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SUBMITTED VIA EDGAR _________
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 SEPTEMBER 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 [ ]
The number of shares outstanding of the registrant's common stock as of October
30, 2000 was 12,526,379.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
2000 1999
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 8,213,184 $ 3,021,869
Marketable securities available for sale, at fair market value 28,110,336 34,856,697
Accounts receivable, net of allowance for doubtful accounts
of $50,305 and $18,355 2,518,181 1,222,850
Interest receivable 341,612 562,318
Inventories 2,240,347 1,862,522
Prepaid expenses and deposits 1,128,008 418,812
------------ ------------
Total current assets 42,551,668 41,945,068
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 6,740,132 7,114,761
------------ ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $2,199,151
and $1,477,698 4,035,806 4,580,325
Deferred finance costs, net of accumulated amortization of
$577,281 and $430,007 851,634 1,018,650
------------ ------------
Other assets, net 4,887,440 5,598,975
------------ ------------
TOTAL ASSETS $ 54,179,240 $ 54,658,804
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,550,709 $ 2,455,605
Interest payable 843,277 211,094
Accrued salaries and payroll taxes 288,526 321,548
Other accrued liabilities 171,612 150,396
Deferred revenue 149,999 160,000
------------ ------------
Total current liabilities 3,004,123 3,298,643
------------ ------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 36,190,000 36,690,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized -- --
Series A preferred stock, $.001 par value, 200,000
shares authorized and no shares issued or outstanding -- --
Series A convertible exchangeable preferred stock, $.001
par value, 20,000 shares authorized; 12,015 shares
issued and outstanding. Liquidation preference
$12,185,514, $0 12 --
Common stock, $.001 par value; 25,000,000 shares authorized;
12,461,887 and 11,435,244 shares issued; 12,461,887
and 11,427,554 shares outstanding 12,462 11,435
Additional paid-in capital 97,966,910 74,495,672
Treasury stock, -0- and 7,690 shares, at cost -- (80,846)
Accumulated other comprehensive loss (1,181,218) (1,696,010)
Accumulated deficit (81,813,049) (58,060,090)
------------ ------------
Total shareholders' equity 14,985,117 14,670,161
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 54,179,240 $ 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 SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ------------
REVENUE:
Net sales and royalties $ 1,767,564 $ 1,250,017
Contract research and development revenue 347,934 311,727
Sale of marketing rights and milestone revenue 150,000 --
------------ ------------
Total revenue 2,265,498 1,561,744
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OPERATING EXPENSES:
Cost of goods sold 810,416 591,563
Research and development 4,575,479 3,237,183
Administrative and marketing 1,058,186 1,569,688
------------ ------------
Total operating expenses 6,444,081 5,398,434
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LOSS FROM OPERATIONS (4,178,583) (3,836,690)
------------ ------------
OTHER (EXPENSE) INCOME:
Equity in loss of joint venture (12,035,025) --
Investment income 522,672 698,385
Interest expense (644,800) (780,147)
Other 9,002 9,173
------------ ------------
Net other (expense) income (12,148,151) (72,589)
LOSS BEFORE EXTRAORDINARY ITEM (16,326,734) (3,909,279)
Extraordinary gain on extinguished debt 79,906 --
------------ ------------
Net loss $(16,246,828) $ (3,909,279)
Accretion of dividend on preferred stock (170,514) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $(16,417,342) $ (3,909,279)
============ ============
Basic and diluted earnings per common share:
Loss before extraordinary item $ (1.36) $ (.34)
Extraordinary item .01 --
------------ ------------
Net loss $ (1.35) $ (.34)
Accretion of dividend on preferred stock (.01) --
------------ ------------
Net loss applicable to common stock $ (1.36) $ (.34)
============ ============
Basic and diluted weighted average common shares
outstanding 12,097,565 11,359,748
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ------------
REVENUE:
Net sales and royalties $ 4,587,785 $ 3,801,117
Contract research and development revenue 1,108,084 805,391
Sale of marketing rights and milestone revenue 255,000 --
------------ ------------
Total revenue 5,950,869 4,606,508
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OPERATING EXPENSES:
Cost of goods sold 1,933,261 1,539,510
Research and development 11,904,657 11,548,189
Administrative and marketing 3,271,036 3,301,234
------------ ------------
Total operating expenses 17,108,954 16,388,933
------------ ------------
LOSS FROM OPERATIONS (11,158,085) (11,782,425)
------------ ------------
OTHER (EXPENSE) INCOME:
Equity in loss of joint venture (12,035,025) --
Investment income 1,410,712 2,220,257
Interest expense (1,941,260) (2,350,121)
Other 87,124 61,664
------------ ------------
Net other (expense) income (12,478,449) (68,200)
LOSS BEFORE EXTRAORDINARY ITEM (23,636,534) (11,850,625)
Extraordinary gain on extinguished debt 79,906 1,034,889
------------ ------------
Net loss $(23,556,628) $(10,815,736)
Accretion of dividend on preferred stock (170,514) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $(23,727,142) $(10,815,736)
============ ============
Basic and diluted earnings per common share:
Loss before extraordinary item $ (2.03) $ (1.05)
Extraordinary item .01 .09
------------ ------------
Net loss $ (2.02) $ (.96)
Accretion of dividend on preferred stock (.01) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (2.03) $ (.96)
============ ============
Basic and diluted weighted average common shares
outstanding 11,672,434 11,301,027
============ ============
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 NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 -- $ -- 11,427,554 $ 11,435 $ 74,495,672
Comprehensive loss:
Net loss -- -- -- -- --
Other comprehensive loss:
- Foreign currency translation
Adjustments - cumulative -- -- -- -- --
- Unrealized gain on
Investments -- -- -- -- --
Net comprehensive loss
Issuance of Series A
Convertible Exchangeable
Preferred Stock to Elan 12,015 12 -- -- 12,014,988
Accretion on preferred stock -- -- -- -- 170,514
Issuance of common stock
and warrants to Elan -- -- 442,478 442 4,999,558
Issuance of common stock
to Pfizer -- -- 447,550 448 4,999,552
Exercise of stock options -- -- 90,177 84 703,194
Exercise of non-qualified stock
options -- -- 4,480 4 29,698
Issuance for employee stock
purchase plan -- -- 8,707 8 73,330
Issuance of restricted stock -- -- 40,941 41 480,404
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 12,015 $ 12 12,461,887 $ 12,462 $ 97,966,910
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Accumulated
Other Total
Treasury Comprehensive Accumulated Shareholders'
Stock Loss Deficit Equity
------------ ------------- ------------ -------------
Balance, December 31, 1999 $ (80,846) $ (1,696,010) $(58,060,090) $ 14,670,161
Comprehensive loss:
Net loss -- -- (23,727,142) (23,727,142)
Other comprehensive loss:
- Foreign currency translation
Adjustments - cumulative -- (8,108) -- (8,108)
- Unrealized gain on
Investments -- 522,900 -- 522,900
------------
Net comprehensive loss (23,212,350)
Issuance of Series A
Convertible Exchangeable
Preferred Stock to Elan -- -- -- 12,015,000
Accretion on preferred stock -- -- -- 170,514
Issuance of common stock
and warrants to Elan -- -- -- 5,000,000
Issuance of common stock
to Pfizer -- -- -- 5,000,000
Exercise of stock options 69,029 -- (23,920) 748,387
Exercise of non-qualified stock
options -- -- -- 29,702
Issuance for employee stock
purchase plan 11,817 -- (1,897) 83,258
Issuance of restricted stock -- -- -- 480,445
------------ ------------ ------------ ------------
Balance, September 30, 2000 $ -- $ (1,181,218) $(81,813,049) $ 14,985,117
============ ============ ============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common stock $(23,727,142) $(10,815,736)
Adjustments to reconcile net loss to net cash used in
operating activities:
Accretion of dividend on preferred stock 170,514 --
Depreciation 804,931 793,721
Amortization 859,245 666,398
Equity in loss of joint venture 12,035,025 --
(Gain) loss on sale of property, plant and equipment (7,555) 26,365
Compensation - restricted stock 75,620 371,250
Loss on sale of marketable securities 171,583 11,750
Extraordinary gain on extinguishment of debt (79,906) (1,034,889)
Write-off of obsolete patents 2,656 2,345
Net changes in operating assets and liabilities:
Accounts receivable (1,309,722) 4,492,080
Interest receivable 220,706 153,369
Inventories (390,105) 535,162
Prepaid expenses and deposits (709,463) (143,579)
Accounts payable - trade (758,792) (232,325)
Short-term debt -- 1,000,000
Interest payable 632,183 714,674
Accrued salaries and payroll taxes (32,374) 58,405
Other accrued liabilities 22,424 (152,609)
Deferred revenue (10,001) (150,212)
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Net cash used in operating activities (12,030,173) (3,703,831)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unconsolidated joint venture (12,035,025) --
Acquisition of property, plant and equipment (444,034) (1,077,303)
Acquisition of leasehold improvements -- (3,743)
Investments in intangible assets (157,193) (165,615)
Proceeds from sale of property, plant and equipment 20,025 28,625
Proceeds from sale of marketable securities 7,402,545 3,488,250
Proceeds from maturity of marketable securities -- 9,035,713
Investment in marketable securities (310,136) (19,468,288)
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Net cash used in investing activities (5,523,818) (8,162,361)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 23,281,172 697,493
Extinguished convertible long-term debt (408,000) (4,285,000)
------------ ------------
Net cash provided by (used in) financing activities 22,873,172 (3,587,507)
------------ ------------
NET EFFECT OF EXCHANGE RATE ON CASH (127,866) (3,920)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,191,315 (15,457,619)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,021,869 18,556,641
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,213,184 $ 3,099,022
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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. The corresponding activity will be
maintained in a subsidiary ledger using the Euro as its functional currency. Our
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. Atrix Laboratories Limited has received mutual
recognition to distribute ATRIDOX(R) in 11 countries. We recently received
individual marketing authorizations in Belgium, Finland, France, Greece,
Ireland, Italy and the Netherlands. Marketing authorizations in four other
countries are pending. 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.
In July 2000, we formed Atrix Newco Ltd., a joint venture, with Elan
Corporation, plc. The joint venture was organized to develop and commercialize
oncology and pain management products. We are the majority-owner of Atrix Newco,
Ltd. with an 80.1% equity ownership. The purpose of this joint venture is to use
our patented ATRIGEL(R) and BEMA(TM) drug delivery systems and Elan's
nanoparticulate drug delivery technology to deliver compounds targeted for major
unmet medical needs in oncology and pain management.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. The inventory components at
September 30, 2000 and December 31, 1999, are as follows:
September 30, 2000 December 31, 1999
------------------ -----------------
Raw Materials $1,744,406 $1,486,289
Work in Process 202,653 300,571
Finished Goods 293,288 75,662
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$2,240,347 $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:
SEPTEMBER 30, DECEMBER 31,
2000 1999
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Land $ 1,071,018 $ 1,071,018
Building 3,604,982 3,573,695
Leasehold improvements 470,002 470,002
Furniture & fixtures 388,262 387,549
Machinery 4,818,849 4,517,952
Office equipment 741,031 686,958
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Total property, plant and equipment 11,094,144 10,707,174
Accumulated depreciation and
amortization (4,354,012) (3,592,413)
------------ ------------
Property, plant and equipment, net $ 6,740,132 $ 7,114,761
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Betterments, renewals and extraordinary repairs that extend the life of
an asset are capitalized; other repairs and maintenance are expensed. Repairs
and maintenance expense was approximately $201,000 and $196,000 for the nine
months ended September 30, 2000 and 1999, respectively.
NOTE 4. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share excludes dilution and is
computed by dividing net income (loss) by the weighted-average number of common
shares outstanding during the periods presented. Diluted net income (loss) per
common share reflects the potential dilution of securities that could
participate in the earnings. Stock options, warrants outstanding and their
equivalents are included in earnings per share computations through the treasury
stock method unless they are antidilutive or exercise cannot take place within
five years. Convertible securities are included in earnings per share
computations through the "if converted" method unless they are antidilutive. For
the periods presented, the effect of assuming exercise of our outstanding
warrants and conversion of our convertible subordinated notes are excluded from
the earnings per share computations, since the effect would be antidilutive. The
effect of assuming conversion of our Series A convertible preferred stock is
excluded from the earnings per share computations, since the conversion option
commences July 18, 2002. Additionally, since we did not draw any proceeds under
the convertible promissory note agreement with Elan, there was no effect on our
earnings per share computations pertaining to this convertible promissory note
for the periods presented. The effect of assuming exercise of our stock options
and equivalents is dilutive, however, diluted net income (loss) per share is not
different from basic net income (loss) per common share for the periods
presented.
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.
During the nine-month period ended September 30, 2000, we repurchased a
total of $500,000, or 1%, of our outstanding 7% convertible subordinated notes
for approximately $415,000, which includes approximately $7,000 accrued interest
paid. As a result, we recognized an extraordinary gain of approximately $80,000,
net of deferred finance charges and accumulated amortization of approximately
$12,000. As of September 30, 2000, $36,190,000 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. Revenue and expenses are translated at
average exchange rates in effect during the period. Translation adjustments
resulting from these translations are included in stockholders' equity other
comprehensive loss 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 other income or expense as they occur. To date, the
effect on income of such amounts has been immaterial. Sales by our foreign
subsidiaries during the period ended September 30, 2000 were not material.
NOTE 7. JOINT VENTURE
On July 18, 2000, we formed a joint venture named Atrix Newco, Ltd.
with Elan International Services, Ltd., a wholly owned subsidiary of Elan
Corporation, plc. Newco is a Bermuda limited company and is initially owned
80.1% by us and 19.9% by Elan. Newco's purpose is to develop and commercialize
oncology and pain management products. In a related transaction, Elan purchased
12,015 shares of our Series A convertible exchangeable preferred stock on July
18, 2000 for $12,015,000. See Note 8. We used the proceeds of the preferred
stock sale to purchase 6,000 shares of Newco's common stock and 3,612 shares of
Newco's preferred stock to fund our share of Newco's initial capitalization.
Elan may also loan us up to $8,010,000 to support our share of the joint
venture's research and development costs pursuant to a convertible promissory
note issued by us to Elan. See Note 9. Elan purchased 442,478 shares of our
common stock for $5,000,000 and we issued Elan a five-year warrant to purchase
up to 1,000,000 shares of our common stock for $18 per share in conjunction with
the formation of our joint venture. See note 8. Under the terms of the related
agreements, Newco paid $15,000,000 to Elan in July 2000 for a license giving
Newco exclusive rights to use Elan's nanoparticulate drug delivery technology.
While we own 80.1% of the outstanding common stock of Newco, Elan and its
subsidiaries have retained significant minority investor rights that are
considered "participating rights" as defined in Emerging Issues Task Force
Bulletin 96-16. Accordingly, we will not consolidate the financial statements of
Newco, but will instead account for our investment in Newco under the equity
method of accounting. During the quarter ended September 30, 2000, we recognized
no contract revenues for research and development activity performed for Newco.
Newco, for the quarter ended September 30, 2000, had a net loss of $15,025,000
reflecting a one-time charge to research and development expense of $15,000,000
for a license fee paid by Newco to Elan for exclusive access to Elan's
nanoparticulate drug delivery technology.
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NOTE 8. SHAREHOLDERS' EQUITY
Series A Convertible Exchangeable Preferred Stock
In July 2000, Elan purchased 12,015 shares of our Series A convertible
exchangeable preferred stock for $12,015,000 in conjunction with the formation
of Newco. See Note 7. This preferred stock bears an annual dividend of 7%,
accruing semi-annually and payable by the issuance of additional shares of
preferred stock. This preferred stock is convertible at any time after July
2002, at Elan's option, into our common stock at a price equivalent to $18.00
per share, subject to weighted average anti-dilution adjustment. Additionally,
in the event of a merger or consolidation of Atrix or a sale of our common stock
in an underwritten public offering, we have the option to convert the Series A
preferred stock into our common stock. As of September 30, 2000 we had accrued
dividends of approximately $171,000. Alternatively, Elan has an option to
exchange this preferred stock for a 30.1% interest in Newco, increasing Elan's
ownership in Newco to 50% and decreasing our ownership in Newco to 50%. This
exchange option, if exercised within the first two years of formation of the
joint venture, provides that the preferred stock will be exchanged for
non-voting convertible preferred stock of Newco. This exchange right will
terminate if the preferred stock is converted into our common stock, unless we
cause this conversion. The Series A preferred stock must be redeemed by us in
July 2006 for either cash or shares of our common stock, as we may choose, in an
amount or value equal to the liquidation preference.
Warrants
In July 2000, we issued a five-year warrant to purchase up to 1,000,000
shares of our common stock to Elan in conjunction with the formation of our
joint venture. See Note 7. The warrant expires in July 2005 and may be exercised
for $18.00 per share.
NOTE 9. PROMISSORY NOTE
In July 2000, Elan and our company formed Newco, a joint venture to
develop and commercialize oncology and pain management products. See Note 7.
Subject to the satisfaction of certain conditions, Elan has agreed to loan us up
to $8,010,000 under a convertible promissory note agreement in support of our
80.1% share of Newco's research and development costs. The note has a six-year
term, will accrue interest at 7% per annum, compounded semi-annually and added
to principal, and is convertible at Elan's option into our common stock at a
$14.60 conversion price. The note also allows us to convert this debt into our
common stock at the prevailing market price at maturity. As of September 30,
2000, we had not drawn any amounts under the note.
NOTE 10. PENDING LEGAL ACTION
Several disputes exist with Block Drug Company concerning product
pricing and the payment of milestone revenue. We initiated legal action to
resolve the product pricing dispute. In addition, we believe that pursuant to
our agreement with Block, milestone revenue of $1,000,000 for the FDA approval
of our ATRISORB(R)-DOXY Barrier product was earned during the three months ended
September 30, 2000, but will not be recognized unless and until the dispute with
Block is resolved in our favor. Pursuant to our agreement with Block, we will be
entitled to additional milestone revenue of $2,000,000 upon Block's first
commercial sale of the ATRISORB(R)-DOXY Barrier product in the United States.
The Block agreement provides that the first commercial sale of this product in
the U.S. must occur within 120 days after FDA approval, subject to certain
conditions which have been satisfied. We intend to vigorously pursue our right
to these milestone payments.
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;
(iii) the time and expenses associated with the regulatory approval process for
products; (iv) the safety and effectiveness of our products and technologies;
(v) the timing of new product launches; and (vi) expected future additional
equity losses for Newco. 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."
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OVERVIEW
We are working actively to establish our five safe and effective,
patented drug delivery technologies in diverse new products developed in-house
and through partnerships with global pharmaceutical and biotechnology companies.
Our drug delivery systems deliver controlled amounts of drugs in time frames
ranging from minutes to months - to address a range of therapeutic and patient
needs. Our ATRIGEL(R) system may provide benefits over traditional methods of
drug administration such as: safety, broadly applicable, site-specific,
systemic, customized release rates, biodegradability and ease of application.
We commenced the market launch of our flagship periodontal disease
treatment product ATRIDOX(R) in September 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. We realized a net profit for the first time in 1998 primarily as a
result of earning $17 million in milestone revenue from Block Drug, our
marketing partner for our ATRIDOX(R) and ATRISORB(R) products, 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 nine months ended September 30, 2000.
Several disputes exist with Block Drug Company concerning product
pricing and the payment of milestone revenue. We initiated legal action to
resolve the product pricing dispute. In addition, we believe that pursuant to
our agreement with Block, milestone revenue of $1,000,000 for the FDA approval
of our ATRISORB(R)-DOXY Barrier product was earned during the THREE MONTHS ended
September 30, 2000, but will not be recognized unless and until the dispute with
Block is resolved in our favor. Pursuant to our agreement with Block, we will be
entitled to additional milestone revenue of $2,000,000 upon Block's first
commercial sale of the ATRISORB(R)-DOXY Barrier product in the United States.
The Block agreement provides that the first commercial sale of this product in
the U.S. must occur within 120 days after FDA approval, subject to certain
conditions which have been satisfied. We intend to vigorously pursue our right
to these milestone payments.
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, Ireland, France and Greece. Marketing authorizations in four other
countries are pending. We anticipate European sales of the product to commence
in the fourth 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 are entitled to receive royalties on Canadian sales and
manufacturing margins.
We shifted our research and development focus from dental to medical
products in 1999. We continue to devote significant resources to the research
and development of Leuprogel(TM) and Atrisone(TM). 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. We have recently added 18
compounds in various stages of preclinical development through partnerships with
12 different external companies. We also have approximately 8 different
in-house projects in preclinical development. Because all of these projects are
quite preliminary in nature, we cannot predict whether any of them will be
successful. Research and development expenditures continued for existing and
future dental products as well, including our recently FDA approved
ATRISORB(R)-DOXY Barrier periodontal disease surgery product. The
ATRISORB(R)-DOXY Barrier product is a second-generation GTR barrier that
combines the benefits of the ATRISORB(R) GTR Barrier product with the antibiotic
doxycycline and is designed to reduce microbial contamination at the periodontal
surgical site. In September 2000, we announced that we had received FDA approval
to market our ATRISORB(R)-DOXY Barrier product.
Early in 2000, we announced that we achieved successful interim results
with our Leuprogel(TM) 30-day prostate cancer treatment product in the ongoing
Phase III human clinical trials. 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. Due to our early
success with our Leuprogel(TM) 30-day product, we submitted Investigational New
Drug applications to the FDA for our 90-day and 120-day release versions of our
Leuprogel(TM) products and in June 2000 we initiated patient enrollment in our
90-day product. Our Leuprogel(TM) product line may offer clinical advantages
over existing treatments, since Leuprogel(TM) incorporates a smaller needle and
is delivered subcutaneously, rather than the more painful intramuscular
injection.
Another market we have targeted is the treatment of acne, the most
frequent condition seen by dermatologists. Our patented topical Solvent /
Microparticle (SMP(TM)) delivery system allows for maximum delivery of the water
insoluble antibiotic dapsone to acne lesions. Atrisone(TM) is currently in Phase
II clinical trials for moderate to severe acne. Additionally, in April 2000, we
submitted an Investigational New Drug application to the FDA for the use of
Atrisone(TM) for the treatment of chronic itch associated with healed and
healing burn wounds.
We are forming strategic alliances with large pharmaceutical and
biotechnology companies utilizing our various drug delivery systems. Such
alliances include the formation of a joint venture, Atrix Newco, Ltd., with Elan
Corporation, plc. Other significant strategic alliances include Pfizer Inc., Del
Pharmaceuticals, and Pharmacia & Upjohn Company. Our joint venture with Elan
Corporation, plc was formed with the purpose of developing and commercializing
oncology and pain management products. We expect that the first compound to
develop in our joint venture will be the opiate analgesic, fentanyl, using our
BEMA(TM) drug delivery system for breakthrough cancer pain and management of
chronic pain. As part of our agreement, Elan may provide funding to develop this
and any future selected compounds. Initially, we are the majority-owner of this
joint venture. Additionally,
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Elan made equity investments in our company. This joint venture will use our
patented BEMA(TM) and ATRIGEL(R) drug delivery systems and Elan's
nanoparticulate drug delivery technology to deliver compounds targeted for major
unmet medical needs in oncology and pain management.
In August 2000, we executed a comprehensive research and worldwide
licensing agreement with Pfizer Inc. to provide broad-based access to our
proprietary drug delivery systems in the development of new products. Pfizer
will provide funding to develop and commercialize their selected compounds using
our patented drug delivery technologies. We retained manufacturing rights, and
will receive royalties on the sales of products that are successfully developed
and commercialized under this agreement. Pfizer also purchased $5 million of our
common stock as part of the agreement.
In August 2000, we also entered into a collaboration, development and
supply agreement with Geneva Pharmaceuticals, Inc. to conduct research and
development activities on a collaborative basis to develop designated
prescription generic dermatology products. Under the agreement, we will be
responsible for validation, formulation, development and required clinical
studies of selected products. Geneva will be responsible for market research and
commercialization of the products. Geneva will reimburse us for a portion of the
research and development expenses we incur and both parties will share in the
net profits from the sale of the products.
In September 2000, we announced the nationwide sales launch of
Orajel(R) -Ultra Mouth Sore Medicine, a new over-the-counter oral care product
based on our patented Mucocutaneous Absorptive Gel (MCA(TM)) drug delivery
system. Under the terms of the agreement with our marketing partner, Del
Pharmaceuticals Inc., we will receive a royalty on net sales. Additionally, we
received a licensing fee of $150,000 from Del Pharmaceuticals in September 2000.
Pharmacia and Upjohn Company replaced Heska Corporation in April 2000
as our marketing partner for our PERIOceutic(R) product to treat periodontal
disease in companion animals. We will continue to manufacture the product.
Third-party agreements for contract manufacturing utilizing our
state-of-the-art manufacturing facility and contract research and development
activities utilizing our five 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1999
Total revenues for the three months ended September 30, 2000 were
approximately $2,265,000 compared to approximately $1,562,000 for the three
months ended September 30, 1999. The 45% 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 and royalties of approximately $1,768,000 during the
three months ended September 30, 2000 compared to approximately $1,250,000 for
the three months ended September 30, 1999. The 41% increase in sales was
primarily the result of an increase in our contract manufacturing business with
unaffiliated third parties.
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 $348,000 for the three months ended September
30, 2000 compared to approximately $312,000 for the three months ended September
30, 1999, representing a 12% increase. This increase was primarily related to
work on four research projects with three separate unaffiliated third parties.
Sale of marketing rights and milestone revenue for the three months
ended September 30, 2000 was $150,000 compared to $0 for the three months ended
September 30, 1999. This increase was the result of a licensing fee from Del
Pharmaceuticals for the licensing of our patented Mucocutaneous Absorptive Gel
(MCA(TM)) drug delivery system used in Del Pharmaceutical's Orajel(R) -Ultra
Mouth Sore Medicine.
Several disputes exist with Block Drug Company concerning product
pricing and the payment of milestone revenue. We initiated legal action to
resolve the product pricing dispute. In addition, we believe that pursuant to
our agreement with Block, milestone revenue of $1,000,000 for the FDA approval
of our ATRISORB(R)-DOXY Barrier product was earned during the THREE MONTHS ended
September 30, 2000, but will not be recognized unless and until the dispute with
Block is resolved in our favor. Pursuant to our agreement with Block, we will be
entitled to additional milestone revenue of $2,000,000 upon Block's first
commercial sale of the ATRISORB(R)-DOXY Barrier product in the United States.
The Block agreement provides that the first commercial sale of this product in
the U.S. must occur within 120 days after FDA approval, subject to certain
conditions which have been satisfied. We intend to vigorously pursue our right
to these milestone payments.
Cost of goods sold recorded for the three months ended September 30,
2000 was approximately $810,000 compared to approximately $592,000 for the three
months ended September 30, 1999, representing a 37% increase. This increase in
cost of sales is directly related to the increase in sales.
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Research and development expenses for the three months ended September
30, 2000 were approximately $4,575,000 compared to approximately $3,237,000 for
the three months ended September 30, 1999, representing a 41% increase. This
increase was primarily the result of expenditures relating to the development of
our Leuprogel(TM) and Atrisone(TM) product lines.
Administrative and marketing expenses for the three months ended
September 30, 2000 were approximately $1,058,000 compared to approximately
$1,570,000 for the three months ended September 30, 1999, representing a 33%
decrease. The decrease was primarily the result of a fourth quarter 1999
restatement for compensation costs for the issuance of restricted stock to an
executive of our company during the third quarter of 1999.
We recognized a $12,035,000 loss for the three months ended September
30, 2000 for our 80.1% equity share in the loss of our Newco joint venture.
Newco's losses for this period included a $15,000,000 non-cash July 2000 charge
for an exclusive license to use Elan's nanoparticulate drug delivery technology
and approximately $25,000 in accrued expenses attributable to Newco's formation.
We expect to record additional equity losses for Newco in the fourth quarter of
2000 and for the foreseeable future.
Investment income for the three months ended September 30, 2000 was
approximately $523,000 compared to approximately $698,000 for the three months
ended September 30, 1999, representing a 25% decrease. The decrease was
primarily the result of reduced principal investment balances for the three
months ended September 30, 2000.
Interest expense for the three months ended September 30, 2000 was
approximately $645,000 compared to approximately $780,000 for the three months
ended September 30, 1999, representing a 17% decrease. The reduction in interest
expense was primarily the result of our repurchase and retirement of $6,810,000
of our 7% convertible subordinated notes since the period ended September 30,
1999.
During the three months ended September 30, 2000, we repurchased a
total of $500,000, or 1%, of our outstanding 7% convertible subordinated notes
for approximately $415,000, which includes approximately $7,000 accrued interest
paid. As a result, we recognized an extraordinary gain of approximately $80,000,
net of deferred finance charges and accumulated amortization of approximately
$12,000. As of September 30, 2000, $36,190,000 of these notes were outstanding.
There was no repurchase of our convertible notes during the three months ended
September 30, 1999.
We issued Series A convertible exchangeable preferred stock to Elan in
July 2000 in connection with the formation of our joint venture with Elan.
Related to this issuance, we recognized approximately $171,000 for accretion of
dividend on preferred stock for the three months ended September 30, 2000
compared to $0 for the three months ended September 30, 1999.
For the reasons described above, we recorded a net loss of
approximately $16,417,000, or $1.36 per share, for the three months ended
September 30, 2000 compared to a net loss of approximately $3,909,000, or $0.34
per share, for the three months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1999
Total revenues for the nine months ended September 30, 2000 were
approximately $5,951,000 compared to approximately $4,607,000 for the nine
months ended September 30, 1999. The 29% 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 $4,588,000 during the nine months
ended September 30, 2000 compared to approximately $3,801,000 for the nine
months ended September 30, 1999. The 21% increase in sales was primarily the
result of an increase in our contract manufacturing business with unaffiliated
third parties.
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 $1,108,000 for the nine months ended
September 30, 2000 compared to approximately $805,000 for the nine months ended
September 30, 1999, representing a 38% increase. This increase was primarily
related to work on four research projects with three separate unaffiliated third
parties.
Sale of marketing rights and milestone revenue for the nine months
ended September 30, 2000 was approximately $255,000 compared to $0 for the nine
months ended September 30, 1999. This increase was primarily the result of a
licensing fee from Del Pharmaceuticals for the licensing of our patented
Mucocutaneous Absorptive Gel (MCA(TM)) drug delivery system used in Del
Pharmaceutical's Orajel(R) -Ultra Mouth Sore Medicine.
Several disputes exist with Block Drug Company concerning product
pricing and the payment of milestone revenue. We initiated legal action to
resolve the product pricing dispute. In addition, we believe that pursuant to
our agreement with Block, milestone revenue of $1,000,000 for the FDA approval
of our ATRISORB(R)-DOXY Barrier product was earned during the THREE MONTHS ended
September 30, 2000, but will not be recognized unless and until the dispute with
Block is resolved in our favor. Pursuant to our agreement with Block, we will be
entitled to additional milestone revenue of $2,000,000 upon Block's first
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commercial sale of the ATRISORB(R)-DOXY Barrier product in the United States.
The Block agreement provides that the first commercial sale of this product in
the U.S. must occur within 120 days after FDA approval, subject to certain
conditions which have been satisfied. We intend to vigorously pursue our right
to these milestone payments.
Cost of goods sold recorded for the nine months ended September 30,
2000 was approximately $1,933,000 compared to approximately $1,540,000 for the
nine months ended September 30, 1999, representing a 26% increase. This increase
in cost of sales is primarily related to the increase in sales.
Research and development expenses for the nine months ended September
30, 2000 were approximately $11,905,000 compared to approximately $11,548,000
for the nine months ended September 30, 1999, representing a 3% increase. This
increase was primarily the result of approximately $2,667,000 additional
expenditures relating to the development of our Leuprogel(TM) and Atrisone(TM)
product lines for the nine months ended September 30, 2000 in comparison to the
same period in 1999. This increase was offset by a reduction in our development
expenditures for our dental product lines of approximately $2,404,000 for the
nine months ended September 30, 2000 in comparison to the same period in 1999.
Administrative and marketing expenses for the nine months ended
September 30, 2000 were approximately $3,271,000 compared to approximately
$3,301,000 for the nine months ended September 30, 1999.
We recognized a $12,035,000 loss for the nine months ended September
30, 2000 for our 80.1% equity share in the loss of our Newco joint venture.
Newco's losses for this period included a $15,000,000 non-cash July 2000 charge
for an exclusive license to use Elan's nanoparticulate drug delivery technology
and approximately $25,000 in accrued expenses attributable to Newco's formation.
We expect to record additional equity losses for Newco in the fourth quarter of
2000 and for the foreseeable future.
Investment income for the nine months ended September 30, 2000 was
approximately $1,411,000 compared to approximately $2,220,000 for the nine
months ended September 30, 1999, representing a 36% decrease. The decrease was
primarily the result of reduced principal investment balances for the nine
months and a loss on sale of investments for the nine months ended September 30,
2000 of approximately $172,000.
Interest expense for the nine months ended September 30, 2000 was
approximately $1,941,000 compared to approximately $2,350,000 for the nine
months ended September 30, 1999, representing a 17% decrease. The reduction in
interest expense was primarily the result of our repurchase and retirement of
$6,810,000 of our 7% convertible subordinated notes since the period ended
September 30, 1999.
During the nine months ended September 30, 2000, we repurchased a total
of $500,000, or 1%, of our outstanding 7% convertible subordinated notes for
approximately $415,000, which includes approximately $7,000 accrued interest
paid. As a result, we recognized an extraordinary gain of approximately $80,000,
net of deferred finance charges and accumulated amortization of approximately
$12,000. As of September 30, 2000, $36,190,000 of these notes were outstanding.
During the nine months ended September 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 included 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.
We issued Series A convertible exchangeable preferred stock to Elan in
July 2000 in connection with the formation of our joint venture with Elan.
Related to this issuance, we recognized approximately $171,000 for accretion of
dividend on preferred stock for the nine months ended September 30, 2000
compared to $0 for the nine months ended September 30, 1999.
For the reasons described above, we recorded a net loss of
approximately $23,727,000, or $2.03 per share, for the nine months ended
September 30, 2000 compared to a net loss of approximately $10,816,000, or $0.96
per share, for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash and cash equivalents of
approximately $8,213,000, marketable securities (at fair market value) of
approximately $28,110,000 and other current assets of approximately $6,229,000
for total current assets of approximately $42,552,000. Current liabilities
totaled approximately $3,004,000, which resulted in working capital of
approximately $39,548,000.
We have a revolving line of credit with a bank that expires in August
2001. 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 September 30, 2000, we had no outstanding balance under this
line of credit.
In July 2000, Elan and our company formed Newco, a joint venture to
develop and commercialize oncology and pain management products. Subject to the
satisfaction of certain conditions, Elan has agreed to loan us up to $8,010,000
under a
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convertible promissory note agreement in support of our 80.1% share of Newco's
research and development costs. The note has a six-year term, will accrue
interest at 7% per annum, compounded semi-annually and added to principal, and
is convertible at Elan's option into our common stock at a $14.60 conversion
price. The note also allows us to convert this debt into our common stock at the
prevailing market price at maturity. As of September 30, 2000, we had not drawn
any amounts under the note.
During the nine months ended September 30, 2000, net cash used in
operating activities was approximately $12,030,000. This was primarily the
result of the net loss for the period of approximately $23,727,000, adjusted for
certain non-cash expenses, and changes in operating assets and liabilities as
set forth in the consolidated statements of cash flows. $12,035,000 of the loss
was a non-cash charge related to our 80.1% investment in Newco. Newco's losses
in July 2000 included a $15,000,000 non-cash charge for an exclusive license to
use Elan's nanoparticulate drug delivery technology.
Net cash used in investing activities was approximately $5,524,000
during the nine months ended September 30, 2000, primarily as a result of our
$12,015,000 non-cash investment in our joint venture with Elan. We funded the
Newco joint venture with cash proceeds from our issuance of our Series A
convertible exchangeable preferred stock to Elan for $12,015,000. Proceeds from
the sale of marketable securities of approximately $7,403,000 were used for the
purpose of funding operations.
Net cash provided by financing activities was approximately $22,873,000
during the nine months ended September 30, 2000. Included in funds provided by
financing was our $12,015,000 non-cash issuance of Series A preferred stock to
Elan and approximately $5,000,000 common stock investment in our company from
Elan pertaining to the formation of our joint venture with Elan. This preferred
stock bears an annual dividend of 7%, accrued semi-annually and payable by the
issuance of additional shares of preferred stock. Additionally, Pfizer made an
initial $5,000,000 common stock investment in our company as part of our
comprehensive research and worldwide licensing agreement with Pfizer in August
2000. We also used $415,000 cash during the nine months ended September 30, 2000
to repurchase a total of $500,000 of our outstanding 7% convertible subordinated
notes.
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 $444,000 for property, plant and equipment
and approximately $177,000 for patent development in the nine-month period ended
September 30, 2000. We expect our capital expenditures to approximate $700,000
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.
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 2001. However, we cannot assure you
that underlying assumed levels of revenue and expense will prove accurate.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance with respect to revenue recognition issues
and disclosures. As amended by SAB No. 101B, we are required to implement the
provisions of SAB No. 101 no later than the fourth quarter of the fiscal year
ending December 30, 2000. We do not believe SAB No. 101 will have a material
impact on our financial statements.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued which was effective for all fiscal years
beginning after June 15, 1999. In July 1999, SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 was issued. This statement defers the effective date
of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. We have not completed our evaluation of the impact of this statement,
and therefore we are unable to disclose the impact that adoption of SFAS No. 133
will have on our consolidated financial statements.
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
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or on behalf of our company. 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) and
ATRISORB(R) products 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 our company 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 Outcome of our disputes with Block, fees and expenses
associated therewith and impact upon Block's marketing, sales
and distribution of our products.
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 Product liability or other claims against us which may result
in substantial damages or reduce demand for our products.
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 and
ATRISORB(R) products 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.
o The requirement that we must receive separate regulatory
approval for each of our product candidates in each indication
before we can sell them in North America or internationally.
o We may not be successful in acquiring and integrating
technologies and businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES CONCERNING 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
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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 with
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
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 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.
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 September
30, 2000. The fair values that result from these computations are compared with
the fair values of these financial instruments at September 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 September 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 an
increase in the fair value of our financial instruments by
approximately $226,000 per year. A 10% increase 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 $226,000 per year. We maintain a portion of our financial
instruments, including long-term debt instruments of approximately
$7,590,000 at September 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 our 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 $33,976,000 at September 30, 2000 and is lower than the carrying
value by approximately $2,214,000. 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 $724,000.
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 September 30, 2000 was not material. Based on our overall foreign currency
rate exposure at September 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 18, 2000, we formed a joint venture named Atrix Newco, Ltd.
with Elan International Services, Ltd., a wholly owned subsidiary of Elan
Corporation, plc. In connection with the joint venture's formation, we issued
and sold to Elan 12,015 shares of our Series A convertible exchangeable
preferred stock for $12,015,000, 442,478 shares of our common stock for
$5,000,000 and a five-year warrant to purchase up to 1,0000,000 shares of our
common stock at an exercise price of $18 per share. We also issued to Elan a
convertible promissory note pursuant to which Elan may loan us up to $8,010,000
to support our share of the joint venture's research and development costs.
These securities were offered and sold to Elan in a private placement pursuant
to Section 4(2) of the Securities Act of 1933, as amended.
The Series A preferred stock bears an annual dividend of 7%, accrued
semi-annually and added to principal. In addition, holders of the Series A
preferred stock are entitled to participate in any dividends we may declare on
our common stock, on an as-converted basis. The Series A preferred stock is
convertible at any time after July 2002, at Elan's option, into our common
stock at a price of $18.00 per share, subject to weighted average anti-dilution
adjustment. In addition, in the event of a merger or consolidation of Atrix or a
sale of our common stock in an underwritten public offering, we have the option
to convert the Series A preferred stock into our common stock. Elan has an
option to exchange the preferred stock with us for a 30.1% interest in Newco.
This exchange right will terminate if the preferred stock is converted into our
common stock, unless we cause this conversion. If any shares of the preferred
stock are converted or exchanged, such shares will be canceled and will not be
reissuable by us.
We may not issue any additional classes or series of preferred stock
with a liquidation preference, dividend or other rights senior to or pari passu
to the Series A preferred stock, amend our Certificate of Incorporation to
adversely affect the rights of the Series A preferred stock or otherwise change
the rights of the holders of the Series A preferred stock, except in each case
with the prior approval of the holders of at least a majority of the
then-outstanding shares of Series A preferred stock, voting separately as a
series. The holders of the Series A preferred stock are entitled to a
liquidation preference of $1,000 per share (as may be adjusted) and accrued and
unpaid dividends thereon. The Series A preferred must be redeemed by us in July
2006 for either cash or shares of our common stock, as we may choose, in an
amount or value equal to the liquidation preference.
Our convertible promissory note issued to Elan has a six-year term,
will accrue interest at 7% per annum, compounded semi-annually, and is
convertible at Elan's option into our common stock at a $14.60 conversion price.
The agreement also allows us to convert this debt into our common stock at the
prevailing market price at maturity. As of September 30, 2000, we had not drawn
any amounts under this note.
On August 8, 2000, we executed collaborative research and license and
royalty agreements with Pfizer Inc. relating to Pfizer's use of our proprietary
drug delivery technologies and offered and sold to Pfizer 447,550 shares of our
common stock for $5,000,000 cash. We sold these shares to Pfizer in a private
placement pursuant to Section 4(2) of the Securities Act.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 and 4.1 Amended and Restated Certificate of Incorporation
(1)
3.2 and 4.2 Eighth Amended and Restated Bylaws (2)
4.3 Form of Common Stock Certificate (3)
4.4 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)
4.5 Form of Note (included in Indenture, see Exhibit 4.4)
4.6 Rights Agreement (including form of Right
Certificate, as Exhibit A, the form of Summary of
Rights, as Exhibit B) (5)
4.7 Warrant to purchase 6,750 shares of Atrix Common
Stock issued to Gulfstar Investments, Limited (1)
4.8 Registration Rights Agreement, dated as of November
15, 1997, among the Registrant and NationsBanc
Montgomery Securities, Inc. and SBC Warburg Dillon
Read, Inc. (4)
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4.9 Certificate of Designation of the Series A Preferred
Stock filed with the State of Delaware on September
25, 1998 (6)
4.10 Certificate of Designation of Preferences and Rights
of Series A Convertible Exchangeable Preferred Stock
filed with the State of Delaware on July 18, 2000 (7)
4.11 Company Registration Rights Agreement, dated as of
July 18, 2000, between the Registrant and Elan
International Services, Ltd., or EIS (7)
4.12 Warrant, dated as of July 18, 2000, issued by the
Registrant to EIS (7)
4.13 Convertible Promissory Note, dated as of July 18,
2000, issued by the Registrant to EIS (7)
10.1 Securities Purchase Agreement, dated as of July 18,
2000, between the Registrant and EIS (7)*
10.2 See Exhibit 4.8
10.3 Newco Registration Rights Agreement, dated as of July
18, 2000, among Atrix Newco Ltd., or Newco, the
Registrant and EIS (7)
10.4 See Exhibit 4.11
10.5 Subscription, Joint Development and Operating
Agreement, dated as of July 18, 2000, among Elan
Pharma International Limited, or EPIL, EIS, the
Registrant and Newco (7)*
10.6 See Exhibit 4.12
10.7 Company License Agreement, dated as of July 18, 2000,
among the Registrant, Newco and Elan Corporation plc,
or Elan (7)*
10.8 EPIL License Agreement, dated as of July 18, 2000,
among Elan, EPIL, Newco and the Registrant (7)*
10.9 See Exhibit 4.13.
10.10 Stock Purchase Agreement, dated as of August 8, 2000,
between the Registrant and Pfizer (8)
10.11 Collaborative Research Agreement, dated as of August
8, 2000, between the Registrant and Pfizer (8)
10.12 License and Royalty Agreement, dated as of August 8,
2000, between the Registrant and Pfizer (8)
10.13 Collaboration, Development and Supply Agreement dated
as of August 28, 2000 between the Registrant and
Geneva Pharmaceuticals, Inc.*
27. Financial Data Schedule.
(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 Annual
Report on Form 10-K for the fiscal year ended
December 31, 1999 as filed with the Securities and
Exchange Commission.
(3) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended
September 30, 1993 as filed with the Securities and
Exchange Commission.
(4) Incorporated by reference to Registrant's Current
Report on Form 8-K dated November 6, 1997, as filed
with the Securities and Exchange Commission on
December 9, 1997.
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(5) Incorporated by reference to Registrant's
Registration Statement on Form 8-A, file number
000-18231.
(6) Incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form 8-A, as
filed with the Securities and Exchange Commission on
October 1, 1998.
(7) Incorporated by reference to Registrant's Current
Report on Form 8-K dated July 18, 2000, as filed with
the Securities and Exchange Commission on August 4,
2000.
(8) Incorporated by reference to the Registrant's Current
Report on Form 8-K dated August 8, 2000 filed with
the Securities and Exchange Commission on September
7, 2000.
* Portions of this exhibit have been omitted subject to a confidential
treatment request filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K. We filed the following Current Reports on Form
8-K during the quarter ended September 30, 2000:
o Current Report on Form 8-K dated July 18, 2000 filed with the
SEC on August 4, 2000 announcing our joint venture with Elan
Corporation plc and the issuance of our Series A convertible
exchangeable preferred stock, common stock, warrants and
convertible promissory note to Elan in connection therewith;
and
o Current Report on Form 8-K dated August 8, 2000 filed with the
SEC on September 7, 2000 announcing the execution of
collaborative research and license and royalty agreements with
Pfizer Inc. relating to Pfizer's use of our proprietary drug
delivery technologies and an investment by Pfizer in our
common stock.
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)
October 31, 2000 By: /s/ David R. Bethune
--------------------
David R. Bethune
Chairman of the Board of Directors and
Chief Executive Officer
October 31, 2000 By: /s/ Brian G. Richmond
---------------------
Brian G. Richmond
Vice President--Finance, and Assistant
Secretary
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 and 4.1 Amended and Restated Certificate of Incorporation (1)
3.2 and 4.2 Eighth Amended and Restated Bylaws (2)
4.3 Form of Common Stock Certificate (3)
4.4 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)
4.5 Form of Note (included in Indenture, see Exhibit 4.4)
4.6 Rights Agreement (including form of Right Certificate, as
Exhibit A, the form of Summary of Rights, as Exhibit B) (5)
4.7 Warrant to purchase 6,750 shares of Atrix Common Stock issued
to Gulfstar Investments, Limited (1)
4.8 Registration Rights Agreement, dated as of November 15, 1997,
among the Registrant and NationsBanc Montgomery Securities,
Inc. and SBC Warburg Dillon Read, Inc. (4)
4.9 Certificate of Designation of the Series A Preferred Stock
filed with the State of Delaware on September 25, 1998 (6)
4.10 Certificate of Designation of Preferences and Rights of Series
A Convertible Exchangeable Preferred Stock filed with the
State of Delaware on July 18, 2000 (7)
4.11 Company Registration Rights Agreement, dated as of July 18,
2000, between the Registrant and Elan International Services,
Ltd., or EIS (7)
4.12 Warrant, dated as of July 18, 2000, issued by the Registrant
to EIS (7)
4.13 Convertible Promissory Note, dated as of July 18, 2000, issued
by the Registrant to EIS (7)
10.1 Securities Purchase Agreement, dated as of July 18, 2000,
between the Registrant and EIS (7)*
10.2 See Exhibit 4.8
10.3 Newco Registration Rights Agreement, dated as of July 18,
2000, among Atrix Newco Ltd., or Newco, the Registrant and EIS
(7)
10.4 See Exhibit 4.11
10.5 Subscription, Joint Development and Operating Agreement, dated
as of July 18, 2000, among Elan Pharma International Limited,
or EPIL, EIS, the Registrant and Newco (7)*
10.6 See Exhibit 4.12
10.7 Company License Agreement, dated as of July 18, 2000, among
the Registrant, Newco and Elan Corporation plc, or Elan (7)*
10.8 EPIL License Agreement, dated as of July 18, 2000, among Elan,
EPIL, Newco and the Registrant (7)*
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.9 See Exhibit 4.13
10.10 Stock Purchase Agreement, dated as of August 8, 2000, between
the Registrant and Pfizer (8)
10.11 Collaborative Research Agreement, dated as of August 8, 2000,
between the Registrant and Pfizer (8)
10.12 License and Royalty Agreement, dated as of August 8, 2000,
between the Registrant and Pfizer (8)
10.13 Collaboration, Development and Supply Agreement dated as of
August 28, 2000 between the Registrant and Geneva
Pharmaceuticals, Inc.*
27. Financial Data Schedule
(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 Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 as filed
with the Securities and Exchange Commission.
(3) Incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1993 as
filed with the Securities and Exchange Commission.
(4) Incorporated by reference to Registrant's Current Report on
Form 8-K dated November 6, 1997, as filed with the Securities
and Exchange Commission on December 9, 1997.
(5) Incorporated by reference to Registrant's Registration
Statement on Form 8-A, file number 000-18231.
(6) Incorporated by reference to Exhibit 3.1 of Registrant's
Registration Statement on Form 8-A, as filed with the
Securities and Exchange Commission on October 1, 1998.
(7) Incorporated by reference to Registrant's Current Report on
Form 8-K dated July 18, 2000, as filed with the Securities and
Exchange Commission on August 4, 2000.
(8) Incorporated by reference to the Registrant's Current Report
on Form 8-K dated August 8, 2000 filed with the Securities and
Exchange Commission on September 7, 2000.
* Portions of this exhibit have been omitted subject to a confidential treatment
request filed with the Securities and Exchange Commission.