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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 MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ____________
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Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
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
April 19, 1999 was 11,256,839.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ATRIX LABORATORIES, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 5,737,458 $ 18,556,641
Marketable securities, at fair market value 49,297,827 37,102,867
Accounts receivable, net of allowance for doubtful accounts
of $49,165 and $49,165 1,121,280 5,937,446
Interest receivable 525,687 664,374
Inventories 2,680,356 2,563,536
Prepaid expenses and deposits 1,140,352 853,266
------------ ------------
Total current assets 60,502,960 65,678,130
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 9,593,602 9,504,581
Leasehold improvements 605,107 605,107
------------ ------------
Total property plant and equipment 10,198,709 10,109,688
Accumulated depreciation and amortization (3,204,726) (2,978,121)
------------ ------------
Property, plant and equipment, net 6,993,983 7,131,567
------------ ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $746,769 and $522,314 4,843,743 5,049,493
Deferred finance costs, net of accumulated amortization of $333,077 and $252,131 1,423,949 1,620,412
------------ ------------
Total other assets 6,267,692 6,669,905
------------ ------------
TOTAL ASSETS $ 73,764,635 $ 79,479,602
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 2,385,606 $ 1,650,490
Interest payable 1,024,109 279,039
Accrued salaries and payroll taxes 278,367 263,204
Other accrued liabilities 76,116 210,869
Deferred revenue 123,552 153,602
------------ ------------
Total current liabilities 3,887,750 2,557,204
------------ ------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 44,500,000 48,500,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000
shares authorized, none issued or outstanding -- --
Common stock, $.001 par value; 25,000,000
shares authorized; 11,376,221 and 11,360,672 shares
issued; 11,256,839 and 11,203,672 shares outstanding 11,376 11,361
Additional paid-in capital 74,614,151 74,822,942
Treasury stock, 119,382 and 157,000 shares, at cost (1,255,081) (1,650,564)
Accumulated other comprehensive loss (564,300) (96,553)
Accumulated deficit (47,429,261) (44,664,788)
------------ ------------
Total shareholders' equity 25,376,885 28,422,398
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 73,764,635 $ 79,479,602
============ ============
See notes to the financial statements.
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ATRIX LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
REVENUE:
Sales $ 1,228,719 $ 861,720
Contract revenue 257,565 71,616
Licensing 25,000 --
------------ ------------
Total revenue 1,511,284 933,336
------------ ------------
OPERATING EXPENSES:
Cost of goods sold 702,216 667,130
Research and development 3,559,252 2,814,687
Administrative and marketing 782,247 599,905
------------ ------------
Total operating expenses 5,043,715 4,081,722
------------ ------------
LOSS FROM OPERATIONS (3,532,431) (3,148,386)
------------ ------------
OTHER INCOME (EXPENSE):
Investment income 763,665 978,966
Interest expense (793,485) (866,169)
Other 48,042 52,737
------------ ------------
Total other income 18,222 165,534
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (3,514,209) (2,982,852)
------------ ------------
Extraordinary gain on extinguishment of debt 767,299 --
------------ ------------
NET LOSS $ (2,746,910) $ (2,982,852)
============ ============
Basic and diluted earnings per common share:
Loss before extraordinary item $ (.31) $ (.26)
Extraordinary item .07 --
------------ ------------
Net loss $ (.24) $ (.26)
============ ============
Basic and diluted weighted average common shares
outstanding 11,226,347 11,288,929
============ ============
See notes to the financial statements.
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ATRIX LABORATORIES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Treasury Shareholders'
Shares Amount Capital Deficit Loss Stock Equity
---------- ------- ----------- ------------ ------------- ----------- -------------
Balance, December 31, 1998 11,203,672 $11,361 $74,822,942 $(44,664,788) $(96,553) $(1,650,564) $28,422,398
Comprehensive loss:
Net loss --- --- --- (2,746,910) --- --- (2,746,910)
Other comprehensive loss
- Unrealized loss on --- --- --- --- (467,747) --- (467,747)
investments -----------
Total comprehensive loss (3,214,657)
Exercise of stock options 51,929 15 (211,560) (14,050) --- 384,970 159,375
Exercise of non-qualified 1,000 --- --- (3,513) --- 10,513 7,000
stock options
Issuance for employee stock
purchase plan 238 --- 2,769 --- --- --- 2,769
---------- ------- ----------- ------------ --------- ----------- -----------
Balance, March 31, 1999 11,256,839 $11,376 $74,614,151 $(47,429,261) $(564,300) $(1,255,081) $25,376,885
========== ======= =========== ============ ========= =========== ===========
See notes to the financial statements.
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ATRIX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,746,910) $ (2,982,852)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation 252,180 241,918
Amortization 122,926 76,867
Loss on sale of property, plant and equipment 19,426 741
Gain on sale of marketable securities --- (23,438)
Extraordinary gain on extinguishment of debt (767,299) ---
Net changes in operating assets and liabilities:
Accounts receivable 4,827,966 778,726
Interest receivable 138,687 (318,286)
Inventories (116,820) (468,117)
Prepaid expenses and deposits (287,086) (634,978)
Accounts payable - trade 735,116 119,258
Interest payable 745,070 863,014
Accrued salaries and payroll taxes 15,163 26,069
Other accrued liabilities (134,753) (56,500)
Deferred revenue (30,050) 16,667
------------- -------------
Net cash provided by (used in) operating activities 2,773,616 (2,360,911)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (146,377) (250,696)
Investments in intangible assets 147,633 (78,568)
Proceeds from sale of property, plant and equipment 555 2,216
Proceeds from sale of marketable securities --- 10,023,438
Proceeds from maturity of marketable securities 6,230,430 10,000,000
Investment in marketable securities (18,894,184) (14,870,436)
------------- -------------
Net cash provided by (used in) investing activities (12,661,943) 4,825,954
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES: 169,144 140,849
Proceeds from issuance of common stock (3,100,000) ---
------------- -------------
Extinguished convertible long term debt
Net cash provided by (used in) financing activities (2,930,856) 140,849
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,819,183) 2,605,892
------------- -------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,556,641 15,185,841
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,737,458 $ 17,791,733
============= =============
See notes to the financial statements.
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ATRIX LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements of Atrix Laboratories,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim 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 only of normal recurring
accruals) for a fair presentation have been included. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1998, filed with the Securities and
Exchange Commission in the Company's Annual Report Form on 10-K.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. The components of inventories at
March 31, 1999 and December 31, 1998, are as follows:
March 31, 1999 December 31, 1998
-------------- -----------------
Raw Materials $1,769,188 $1,659,097
Work in Process 680,746 393,068
Finished Goods 230,422 511,371
---------- ----------
$2,680,356 $2,563,536
========== ==========
NOTE 3. INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share excludes dilution and is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding during the periods presented. Diluted income (loss) per common share
reflects the potential dilution of securities that could share in the earnings.
For the periods presented, the effect of dilutive stock options is not
significant and the effect of the assumed conversion of convertible subordinated
notes would be antidilutive. Therefore, diluted income (loss) per share is not
materially different from basic income (loss) per common share.
NOTE 4. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1997, the Company issued $50,000,000 of convertible
subordinated notes. These notes bear interest at the rate of 7% and are due in
2004. The notes are convertible, at the option of the holder, into common stock
at any time prior to maturity, unless previously redeemed or repurchased. The
notes are convertible, at the option of the Company, after three years from the
date of issue. The conversion price is set at $19.00 per share.
In January 1999 and March 1999, the Company repurchased a total of
$4,000,000, or 8%, of its outstanding 7% convertible subordinated notes for
approximately $3,100,000. As a result, the Company recognized an extraordinary
gain of approximately $767,000, net of deferred finance charges and accumulated
amortization of approximately $133,000. As of March 31, 1999, $44,500,000 of
these notes are outstanding.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations as well as information contained elsewhere in this Report,
contains statements that constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. These statements include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers with respect to, among other things: (i) whether
the Company will receive, and the timing of, regulatory approvals or clearances
to market potential products, (ii) the results of current and future clinical
trials, (iii) the time and expenses associated with the regulatory approval
process for products and (iv) amounts and proposed uses of estimated future
capital expenditures. The success of the Company's business operations is in
turn dependent on factors such as the receipt and timing of regulatory approvals
or clearances for potential products, the effectiveness of the Company's
marketing strategies to market its current and any future products, the
Company's ability to manufacture products on a commercial scale, the appeal of
the Company's mix of products, the Company's success at entering into and
collaborating with others to conduct effective strategic alliances and joint
ventures, general competitive conditions within the biotechnology and drug
delivery industry and general economic conditions. Forward-looking statements
are not guarantees of future performance and involve risks and uncertainties and
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1998
Total revenues for the three months ended March 31, 1999 were
approximately $1,511,000 compared to approximately $933,000 for the three months
ended March 31, 1998. The 62% increase was primarily due to the increase in
sales as a result of the market launch in September 1998 of the ATRIDOX(R)
product and the ATRISORB(R) FreeFlow GTR Barrier product.
The Company had sales of approximately $1,229,000 during the three
months ended March 31, 1999 compared to approximately $862,000 for the three
months ended March 31, 1998. The 43% increase in sales was primarily the result
of the addition of sales for the ATRIDOX(R) product and the ATRISORB(R) FreeFlow
GTR Barrier product both launched in September 1998.
Contract revenue represents revenue the Company received from grants
and from unaffiliated third parties for performing contract research and
development activities utilizing the Company's technology, and was approximately
$258,000 for the three months ended March 31, 1999 compared to approximately
$72,000 for the three months ended March 31, 1998, representing a 258% increase.
The increase was primarily due to the commencing of several research contracts
since the three months ended March 31, 1998.
Cost of goods sold for the three months ended March 31, 1999 was
approximately $702,000 compared to approximately $667,000 for the three months
ended March 31, 1998, representing a 5% increase. The increase is primarily due
to the increase in sales.
Research and development expenses for the three months ended March 31,
1999, were approximately $3,559,000 compared to approximately $2,815,000 for the
three months ended March 31, 1998, representing a 26% increase. The increase was
primarily the result of additional expenditures in new areas of research.
Administrative and marketing expenses for the three months ended March
31, 1999, were approximately $782,000 compared to approximately $600,000 for the
three months ended March 31, 1998, representing a 30% increase. The increase was
primarily the result of recognition of amortization on assets associated with
the ViroTex Corporation acquisition in November 1998.
Investment income for the three months ended March 31, 1999
approximated $764,000 compared to approximately $979,000 for the three months
ended March 31, 1998, representing a 22% decrease. The decrease was primarily
the result of a reduction in principal investments and a decline in interest
rates on investments during the period.
In January 1999 and March 1999, the Company repurchased a total of
$4,000,000, or 8%, of its outstanding 7% convertible subordinated notes for
approximately $3,100,000. As a result, the Company recognized an extraordinary
gain of approximately $767,000, net of deferred finance charges and accumulated
amortization of approximately $133,000 for the three months ended March 31,
1999. As of March 31, 1999, $44,500,000 of these notes are outstanding.
For the reasons described above, the Company recorded a net loss of
approximately $2,747,000 for the three months ended March 31, 1999 compared to a
net loss of approximately $2,983,000 for the three months ended March 31, 1998,
representing an 8% reduction in net loss.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and cash equivalents of
approximately $5,737,000, marketable securities (at fair market value) of
approximately $49,298,000 and other current assets of approximately $5,468,000
for total current assets of approximately $60,503,000. Current liabilities
totaled approximately $3,888,000, which resulted in working capital of
approximately $56,615,000.
During the three months ended March 31, 1999, net cash provided by
operating activities was approximately $2,774,000. This was primarily a result
of the receipt in January 1999 of a $5,000,000 Block Drug milestone payment
earned in 1998. This milestone payment was offset by a net loss for the period
of approximately $2,747,000, adjusted for certain non-cash expenses, and changes
in other operating assets and liabilities as set forth in the statements of cash
flows.
Net cash used in investing activities was approximately $12,662,000
during the three months ended March 31, 1999. This was primarily a result of the
net investment in marketable securities during the period. Net cash used in
financing activities was approximately $2,931,000 during the three months ended
March 31, 1999, primarily as a result of the repurchase of the Company's
convertible subordinated notes.
The Company's long-term capital expenditure requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, the time required to file and process regulatory approval
applications, the development of the Company's commercial manufacturing
facilities, the ability of the Company to obtain additional licensing
arrangements, and the demand for the Company's products. The Company expended
approximately $146,000 for property, plant and equipment and leasehold
improvements, and approximately $19,000 for patent development in the three
month period ending March 31, 1999. The Company expects its capital expenditures
to approximate $1,500,000 for the year ended December 31, 1999, which will be
used primarily to complete the automation of its manufacturing facility and to
upgrade laboratory equipment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The Company owns financial instruments that are sensitive to market
risks as part of its investment portfolio of cash equivalents and marketable
securities. The investment portfolio is used to preserve the Company's capital
until it is required to fund operations, including the Company's research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. The Company does not own derivative financial instruments
in its investment portfolio. Due to the nature of the Company's investment
portfolio, the investment portfolio contains instruments that are primarily
subject to interest rate risk.
Interest Rate Risk. The Company's investment portfolio includes fixed
rate debt instruments that are primarily United States government and agency
bonds of durations ranging from one to four years. The market value of these
bonds is subject to interest rate risk, and could decline in value if interest
rates decrease. To mitigate the impact of fluctuations in cash flow, the Company
maintains substantially all of its debt instruments as fixed rate. The portion
maintained as fixed rate is dependent on many factors including judgments as to
future trends in interest rates.
The Company's investment portfolio also includes equity interests in
United States government and agency bond funds. The value of these equity
interests is also subject to interest rate risk.
The Company regularly assesses the above-described market risks and has
established policies and business practices to protect against the adverse
effects of these and other potential exposures. The Company's investment policy
restricts investments to U.S. Government or government backed securities, or the
highest rated commercial paper (A1P1) only. As a result, the Company does not
anticipate any material losses in these areas.
For disclosure purposes, the Company uses sensitivity analysis to
determine the impacts that market risk exposures may have on the fair values of
the Company's debt and financial instruments. The financial instruments included
in the sensitivity analysis consist of all of the Company's cash and cash
equivalents and long-term and short-term debt instruments.
To perform sensitivity analysis, the Company assesses the risk of loss
in fair values from the impact of hypothetical changes in interest rates on
market sensitive instruments. The fair values are computed based on the present
value of future cash flows as impacted by the changes in the rates attributable
to the market risk being measured. The discount rates used for the present value
computations were selected based on market interest rates in effect at March 31,
1999. The fair values that result from these computations are compared with the
fair values of these financial instruments at March 31, 1999. The differences in
this comparison are the hypothetical gains or losses associated with each type
of risk. The results of the sensitivity analysis at March 31, 1999 are as
follows:
Interest Rate Sensitivity: A 10% decrease in the levels of interest
rates with all other variables held constant would result in a decrease
in the fair value of the Company's financial instruments by $300,000
per year. A 10% increase in the levels of interest rates with all other
variables held constant would result in an increase in the fair value
of the Company's financial instruments by $300,000 per year. The
Company maintains a portion of its financial instruments, including
long-term debt instruments of $6.7 million at March 31, 1999, at
variable interest rates. If interest rates were to increase 10%, the
impact of such instruments on cash flows or earnings would not be
material.
The use of a 10% estimate is strictly for estimation and evaluation purposes
only. The value of the Company's assets may rise or fall by a greater amount
depending on actual general market performances and the value of individual
securities owned by the Company.
The market price of the Notes generally changes in parallel with the
market price of the Common Stock. When the Common Stock price increases, the
price of the Notes generally increases proportionally. Fair market price of the
Notes can be determined from quoted market prices, where available. The fair
value of the Company's long-term debt was estimated to be $36,000,000 at March
31, 1999 and is lower than the carrying value by $9,000,000. Market risk was
estimated as the potential decrease in fair value resulting from a hypothetical
1% increase in the Company's weighted average long term borrowing rate and a 1%
decrease in quoted market prices, or $1,000,000.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on form 8-K were filed during the period ended
March 31, 1999.
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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)
April 23, 1999 By: /s/ John E. Urheim
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John E. Urheim
Vice Chairman of the Board of Directors and
Chief Executive Officer
April 23, 1999 By: /s/ Brian G. Richmond
----------------------------------------------
Brian G. Richmond
Vice President--Finance, Assistant Secretary,
and Assistant Treasurer
(Principal Financial Officer)