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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 JUNE 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ____________
-----------------
Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
Indicate by check mark whether the registrant ( 1 ) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the registrant's common stock as of
July 7, 1999 was 11,343,453.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,111,082 $ 18,556,641
Marketable securities, at fair market value 44,159,627 37,102,867
Accounts receivable, net of allowance for doubtful accounts
of $49,165 and $49,165 1,059,872 5,937,446
Interest receivable 738,205 664,374
Inventories 2,223,375 2,563,536
Prepaid expenses and deposits 902,607 853,266
------------ ------------
Total current assets 52,194,768 65,678,130
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 10,153,836 9,504,581
Leasehold improvements 605,107 605,107
------------ ------------
Total property plant and equipment 10,758,943 10,109,688
Accumulated depreciation and amortization (3,451,465) (2,978,121)
------------ ------------
Property, plant and equipment, net 7,307,478 7,131,567
------------ ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$979,935 and $522,314 4,871,760 5,049,493
Deferred finance costs, net of accumulated amortization of
$114,570 and $252,131 1,315,246 1,620,412
------------ ------------
Total other assets 6,187,006 6,669,905
------------ ------------
TOTAL ASSETS $ 65,689,252 $ 79,479,602
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,188,656 $ 1,650,490
Interest payable 235,028 279,039
Accrued salaries and payroll taxes 319,485 263,204
Other accrued liabilities 87,009 210,869
Deferred revenue 26,517 153,602
------------ ------------
Total current liabilities 1,856,695 2,557,204
------------ ------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 43,000,000 48,500,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000
shares authorized, none issued or outstanding -- --
Common stock, $.001 par value; 25,000,000
shares authorized; 11,395,254 and 11,360,672 shares
issued; 11,343,453 and 11,203,672 shares outstanding 11,395 11,361
Additional paid-in capital 74,258,831 74,822,942
Treasury stock, 51,801 and 157,000 shares, at cost (544,591) (1,650,564)
Accumulated other comprehensive loss (1,289,954) (96,553)
Accumulated deficit (51,603,124) (44,664,788)
------------ ------------
Total shareholders' equity 20,832,557 28,422,398
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 65,689,252 $ 79,479,602
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
REVENUE:
Sales $ 1,322,384 $ 847,621
Contract revenue 211,099 120,249
Licensing -- 7,000,000
------------ ------------
Total revenue 1,533,483 7,967,870
------------ ------------
OPERATING EXPENSES:
Cost of goods sold 245,736 445,807
Research and development 4,751,374 3,039,379
Administrative and marketing 949,586 726,460
------------ ------------
Total operating expenses 5,946,696 4,211,646
------------ ------------
(LOSS) INCOME FROM OPERATIONS (4,413,213) 3,756,224
------------ ------------
OTHER (EXPENSE) INCOME:
Investment income 758,206 928,572
Interest expense (776,490) (921,359)
Other 4,450 6,945
------------ ------------
Total other (expense) income (13,834) 14,158
------------ ------------
(LOSS) INCOME BEFORE EXTRAORDINARY
ITEM (4,427,047) 3,770,382
------------ ------------
Extraordinary gain on extinguishment of debt 267,590 --
------------ ------------
NET (LOSS) INCOME $ (4,159,457) $ 3,770,382
============ ============
Basic and diluted earnings per common share:
(Loss) Income before extraordinary item $ (.39) $ .33
Extraordinary item .02 --
------------ ------------
Net (loss) income $ (.37) $ .33
============ ============
Basic and diluted weighted average common shares
outstanding 11,315,520 11,310,368
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
REVENUE:
Sales $ 2,551,103 $ 1,709,341
Contract revenue 493,664 191,865
Licensing -- 7,000,000
------------ ------------
Total revenue 3,044,767 8,901,206
------------ ------------
OPERATING EXPENSES:
Cost of goods sold 947,951 1,112,937
Research and development 8,310,626 5,856,486
Administrative and marketing 1,731,834 1,323,947
------------ ------------
Total operating expenses 10,990,411 8,293,370
------------ ------------
(LOSS) INCOME FROM OPERATIONS (7,945,644) 607,836
------------ ------------
OTHER INCOME (EXPENSE):
Investment income 1,521,871 1,907,538
Interest expense (1,569,975) (1,787,528)
Other 52,491 59,682
------------ ------------
Total other income 4,387 179,692
------------ ------------
(LOSS) INCOME BEFORE EXTRAORDINARY
ITEM (7,941,257) 787,528
------------ ------------
Extraordinary gain on extinguishment of debt 1,034,889 --
------------ ------------
NET (LOSS) INCOME $ (6,906,368) $ 787,528
============ ============
Basic and diluted earnings per common share:
(Loss) Income before extraordinary item $ (.70) $ .07
Extraordinary item .09 --
------------ ------------
Net (loss) income $ (.61) $ .07
============ ============
Basic and diluted weighted average common shares
outstanding 11,271,180 11,299,707
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
Common Stock Additional Other Total
------------------------ Paid-in Treasury Comprehensive Accumulated Shareholders'
Shares Amount Capital Stock Loss Deficit Equity
---------- ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 11,203,672 $ 11,361 $ 74,822,942 $ (1,650,564) $ (96,553) $(44,664,788) $ 28,422,398
Comprehensive loss:
Net loss -- -- -- -- -- (6,906,368) (6,906,368)
Other comprehensive loss:
- Cumulative foreign
currency translation
adjustments -- -- -- -- (2,290) -- (2,290)
- Unrealized loss on
investments -- -- -- -- (1,191,111) -- (1,191,111)
------------
Total comprehensive loss (8,099,769)
Exercise of stock options 119,510 15 (763,782) 1,095,460 -- (28,455) 303,238
Exercise of non-qualified
stock options 1,000 -- -- 10,513 -- (3,513) 7,000
Exercise for earn-out
distribution 18,850 19 194,890 -- -- -- 194,909
Issuance for employee stock
purchase plan 421 -- 4,781 -- -- -- 4,781
---------- ------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1999 11,343,453 $ 11,395 $ 74,258,831 $ (544,591) $ (1,289,954) $(51,603,124) $ 20,832,557
========== ============ ============ ============ ============ ============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (6,906,368) $ 787,528
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation 514,570 479,180
Amortization 364,877 158,567
Loss on sale of property, plant and equipment 23,643 8,959
Loss (gain) on sale of marketable securities 11,750 (23,438)
Extraordinary gain on extinguishment of debt (1,034,889) --
Write-off of obsolete patents 2,345 18,611
Net changes in operating assets and liabilities:
Accounts receivable 4,877,574 771,432
Interest receivable (73,832) (325,609)
Inventories 340,161 (750,101)
Prepaid expenses and deposits (49,341) (597,941)
Accounts payable - trade (464,124) (123,518)
Interest payable (44,012) (14,384)
Accrued salaries and payroll taxes 56,282 66,133
Other accrued liabilities (123,860) (58,102)
Deferred revenue (127,085) 6,668
------------ ------------
Net cash (used in) provided by operating activities (2,632,309) 403,985
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (739,249) (723,164)
Investments in intangible assets (54,324) (149,497)
Proceeds from sale of property, plant and equipment 25,125 2,713
Proceeds from sale of marketable securities 2,488,250 10,023,438
Proceeds from maturity of marketable securities 8,617,826 23,618,987
Investment in marketable securities (19,375,807) (36,023,793)
------------ ------------
Net cash used in investing activities (9,038,179) (3,251,316)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 509,929 148,458
Extinguished convertible long term debt (4,285,000) --
------------ ------------
Net cash (used in) provided by financing activities (3,775,071) 148,458
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (15,445,559) (2,698,873)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,556,641 15,185,841
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,111,082 $ 12,486,968
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Atrix
Laboratories, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
consolidated financial statements and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, all adjustments
considered necessary (which consist of normal recurring accruals and
intercompany elimination entries) for a fair presentation have been included.
These consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1998, filed with the Securities and Exchange Commission in the Company's Annual
Report Form on 10-K.
On June 16, 1999, the Company's wholly owned registered subsidiary,
Atrix Laboratories Limited, based in London, England, commenced operations.
Atrix Laboratories Limited was organized to conduct international operations of
the Company. Currently, the subsidiary handles the sale of Atridox(R) in the
United Kingdom. As mutual recognition for the product is established and
distributor partnerships are consummated, Atrix Laboratories Limited will
coordinate such operations and the corresponding activity will be maintained in
a subsidiary ledger using the British pound as its base currency. The subsidiary
financials were converted from British pounds to United States dollars prior to
consolidation and all significant intercompany balances and transactions have
been eliminated.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. The components of inventories at
June 30, 1999 and December 31, 1998, are as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Raw Materials $ 1,757,208 $1,659,097
Work in Process 231,129 393,068
Finished Goods 235,038 511,371
---------- ----------
$2,223,375 $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.
Since January 1, 1999, the Company has repurchased a total of
$5,500,000, or 11%, of its outstanding 7% convertible subordinated notes for
$4,380,000, which includes approximately $95,000 accrued interest paid. As a
result, the Company recognized an extraordinary gain of approximately
$1,035,000, net of deferred finance charges and accumulated amortization of
approximately $180,000. As of June 30, 1999, $43,000,000 of these notes are
outstanding.
NOTE 5. TRANSLATION OF FOREIGN CURRENCIES
The Company's primary functional currency is the U.S. dollar. Foreign
subsidiaries with a functional currency other than the U.S. dollar translate net
assets at period-end exchange rates, while income and expense accounts are
translated at weighted-average exchange rates. Adjustments resulting from these
translations are reflected in stockholders' equity as cumulative foreign
currency translation adjustments. Some transactions of the Company and its
subsidiary are made in currencies different from their functional currency.
Gains and losses from these transactions are included in income as they occur.
To date, the effect on income of such amounts has been immaterial. Sales of the
Company's foreign subsidiary during the period ending June 30, 1999 were not
material.
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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, and (iii) the time and expenses associated with the regulatory approval
process for products. The success of the Company's business operations is in
turn dependent on factors such as the receipt and timing of regulatory approvals
or clearances for potential products, the effectiveness of the Company's
marketing strategies to market its current and any future products, the
Company's ability to manufacture products on a commercial scale, the appeal of
the Company's mix of products, the Company's success at entering into and
collaborating with others to conduct effective strategic alliances and joint
ventures, general competitive conditions within the biotechnology and drug
delivery industry and general economic conditions. Forward-looking statements
are not guarantees of future performance and involve risks and uncertainties and
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1998
Total revenues for the three months ended June 30, 1999 were
approximately $1,533,000 compared to approximately $7,968,000 for the three
months ended June 30, 1998. The 81% decrease was primarily due to the $7 million
milestone received from Block Drug Company during the second quarter 1998.
The Company had sales of approximately $1,322,000 during the three
months ended June 30, 1999 compared to approximately $848,000 for the three
months ended June 30, 1998. The 56% 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
$211,000 for the three months ended June 30, 1999 compared to approximately
$120,000 for the three months ended June 30, 1998, representing a 76% increase.
The increase was primarily related to additional research contracts entered into
since the last half of 1998.
Cost of goods sold recorded for the three months ended June 30, 1999
was approximately $246,000 compared to approximately $446,000 for the three
months ended June 30, 1998, representing a 45% decrease. While sales have
increased, the decrease in cost of goods sold is primarily related to sales of
ATRIDOX(R) and ATRISORB(R) FreeFlow GTR Barrier products in 1999 at a greater
profit margin than sales of ATRISORB(R) GTR Barrier product during the same
period in 1998.
Research and development expenses for the three months ended June 30,
1999, were approximately $4,751,000 compared to approximately $3,039,000 for the
three months ended June 30, 1998, representing a 56% increase. The increase was
primarily the result of additional expenditures in new areas of research
including development of technologies acquired with the acquisition of ViroTex
Corporation ("ViroTex") in November 1998.
Administrative and marketing expenses for the three months ended June
30, 1999, were approximately $950,000 compared to approximately $726,000 for the
three months ended June 30, 1998, representing a 31% increase. The increase was
primarily the result of recognition of amortization on assets associated with
the ViroTex acquisition in November 1998.
Investment income for the three months ended June 30, 1999 was
approximately $758,000 compared to approximately $929,000 for the three months
ended June 30, 1998, representing an 18% decrease. The decrease was primarily
the result of a reduction in principal investments and a decline in interest
rates on investments for the three months ended June 30, 1999.
Interest expense for the three months ended June 30, 1999 was
approximately $776,000 compared to approximately $921,000 for the three months
ended June 30, 1998, representing a 16% decrease. The reduction in interest
expense was the result of the Company's repurchase and retirement of $7,000,000
of its 7% convertible subordinated notes since the period ending June 30, 1998.
In the three months ended June 30, 1999, the Company repurchased a
total of $1,500,000, or 3%, of its outstanding 7% convertible subordinated notes
for $1,233,000, which includes approximately $48,000 accrued interest paid. As a
result, the Company recognized an extraordinary gain of approximately $268,000,
net of deferred finance charges and accumulated amortization of approximately
$47,000, for the three months ended June 30, 1999. As of June 30, 1999,
$43,000,000 of these notes are outstanding.
For the reasons described above, the Company recorded a net loss of
approximately $4,159,000 for the three months ended June 30, 1999 compared to
net income of approximately $3,770,000 for the three months ended June 30, 1998.
Excluding
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the $7 million milestone received during the second quarter of 1998, the net
income in the second quarter of 1998 would be restated as a net loss of
approximately $3,230,000.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1998
Total revenues for the six months ended June 30, 1999 were
approximately $3,045,000 compared to approximately $8,901,000 for the six months
ended June 30, 1998. The 66% decrease was primarily due to the $7 million
milestone received from Block Drug Company during the second quarter 1998.
The Company had sales of approximately $2,551,000 during the six months
ended June 30, 1999 compared to approximately $1,709,000 for the six months
ended June 30, 1998. The 49% 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
$494,000 for the six months ended June 30, 1999 compared to approximately
$192,000 for the six months ended June 30, 1998, representing a 157% increase.
The increase was primarily related to additional research contracts entered into
since the last half of 1998.
Cost of goods sold recorded for the six months ended June 30, 1999 was
approximately $948,000 compared to approximately $1,113,000 for the six months
ended June 30, 1998, representing a decrease of 15%. While sales have increased,
the decrease in cost of goods sold is primarily related to sales of ATRIDOX(R)
and ATRISORB(R) FreeFlow GTR Barrier products in 1999 at a greater profit margin
than sales of ATRISORB(R) GTR Barrier product during the same period in 1998.
Research and development expenses for the six months ended June 30,
1999, were approximately $8,311,000 compared to approximately $5,856,000 for the
six months ended June 30, 1998, representing a 42% increase. The increase was
primarily the result of additional expenditures in new areas of research
including development of technologies acquired with the acquisition of ViroTex
in November 1998.
Administrative and marketing expenses for the six months ended June 30,
1999, were approximately $1,732,000 compared to approximately $1,324,000 for the
six months ended June 30, 1998, representing a 31% increase. The increase was
primarily the result of recognition of amortization on assets associated with
the ViroTex acquisition in November 1998.
Investment income for the six months ended June 30, 1999 was
approximately $1,522,000 compared to approximately $1,908,000 for the six months
ended June 30, 1998, representing a 20% decrease. The decrease was primarily the
result of a reduction in principal investments and a decline in interest rates
on investments for the six months ended June 30, 1999.
Interest expense for the six months ended June 30, 1999 approximated
$1,570,000 compared to approximately $1,788,000 for the six months ended June
30, 1998, representing a 12% decrease. The reduction in interest expense was the
result of the Company's repurchase and retirement of $7,000,000 of its 7%
convertible subordinated notes since the period ending June 30, 1998.
Since January 1, 1999, the Company has repurchased a total of
$5,500,000, or 11%, of its outstanding 7% convertible subordinated notes for
approximately $4,380,000, which includes approximately $95,000 accrued interest
paid. As a result, the Company recognized an extraordinary gain of approximately
$1,035,000, net of deferred finance charges and accumulated amortization of
approximately $180,000. As of June 30, 1999, $43,000,000 of these notes are
outstanding.
For the reasons described above, the Company recorded a net loss of
approximately $6,906,000 for the six months ended June 30, 1999 compared to net
income of approximately $788,000 for the six months ended June 30, 1998.
Excluding the $7 million milestone received during the second quarter of 1998,
the net income for the six months ended June 30, 1998 would be restated to a net
loss of approximately $6,212,000.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash and cash equivalents of
approximately $3,111,000, marketable securities (at fair market value) of
approximately $44,160,000 and other current assets of approximately $4,924,000
for total current assets of approximately $52,195,000. Current liabilities
totaled approximately $1,857,000, which resulted in working capital of
approximately $50,338,000.
During the six months ended June 30, 1999, net cash used in operating
activities was approximately $2,632,000. This was primarily a result of the net
loss for the period of approximately $6,906,000, 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 $9,038,000
during the six months ended June 30, 1999. This was primarily a result of the
net investment of approximately $8,270,000 in marketable securities during the
period. Additionally, approximately $739,000 was invested in the acquisition of
property, plant and equipment. Net cash used in financing activities was
approximately $3,775,000 during the six months ended June 30, 1999. This was
primarily a result of the repurchase of the Company's 7% convertible
subordinated notes for $4,285,000.
The Company's long-term capital expenditure requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, the time required to file and process regulatory approval
applications, the development of the Company's commercial manufacturing
facilities, the ability of the Company to obtain additional licensing
arrangements, and the demand for the Company's products. The Company expended
approximately $739,000 for property, plant and equipment and leasehold
improvements, and approximately $62,000 for patent development in the six-month
period ending June 30, 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.
YEAR 2000
The Year 2000 problem concerns the application of computer systems
written using six (e.g., 12/31/00) versus eight (e.g., 12/31/2000) digits to
define the applicable date. Any programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations.
The Company's Year 2000 plan includes a four-phase process to evaluate
its internal status with respect to the Year 2000 issue: inventory, system
testing, remediation and preparation of contingency plans. In the first phase,
which the Company completed in the first quarter of 1999, the Company conducted
an inventory of its systems, including both information technology ("IT")
systems and non-IT systems such as hardware and manufacturing equipment
containing embedded technology, for Year 2000 compliance. The Company has
identified its critical and medium priority internal systems. The remaining
systems are considered to be of low priority because they are determined to have
no direct impact on safety or the business.
The Company is currently engaged in phase two (system testing) and
phase three (remediation), simultaneously. Progress continues to be made in
phases two and three of the Company's Year 2000 plan in which systems that are
not Year 2000 compliant are either repaired, replaced or retired. All corrected
applications and data elements are implemented and tested in the production
environment. The systems that have been tested are either Year 2000 compliant or
are expected to be made compliant at an immaterial cost to the Company. Although
the Company does not expect that the impact of the Year 2000 issue will be
material in systems still under evaluation, there can be no assurance that the
Company will not discover Year 2000 issues in the course of its evaluation
process that would have a material adverse effect on the business, financial
condition or results of Company operations. Phases two and three of the Year
2000 plan are expected to be completed during the third quarter of 1999.
The Company is in the process of requesting and assessing compliance
information from its critical suppliers, strategic partners, financial
organizations and utility providers with which the Company depends on in the
business operations. These business entities may refuse to respond to a
readiness survey or request for information. It is possible that these business
entities may, in fact, be prepared to address Year 2000 concerns, however,
simply neglect to respond. Conversely, various business entities may respond
that they are Year 2000 ready, when in fact, they are not prepared. If the Year
2000 problem causes these business entities to fail to deliver essential
materials and services, disruptions in the Company's operations, computer
infrastructure or telecommunications systems could result. Because of the
inherent uncertainties associated with the Year 2000 problem, including
understanding the Year 2000 readiness of these key third parties, it is not
possible to accurately quantify the potential impact at this time. Failure to
adequately address the Year 2000 problem in a timely manner by key suppliers,
utility providers or the Company could potentially have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
Additionally, there can be no guarantee that any contingency plans developed by
the Company will prevent such failures from having a material adverse effect.
The Company believes that there is a low probability that these multiple
failures are likely to occur. The Company expects to complete this survey in the
fourth quarter of 1999. At this time, the Company cannot estimate the effect, if
any, that non-compliant systems at these entities could have on the business,
financial condition or results of operations of the Company, and there can be no
assurance that the impact, if any, will not be material.
Phase four (contingency planning) of the Year 2000 plan, will involve
taking any necessary corrective actions to bring systems into compliance and to
develop a contingency plan in the event any non-compliant critical systems
remain by January 1,
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2000. The Company expects to establish its contingency plan in the fourth
quarter of 1999, after the completion of phases two and three. As part of this
phase, the Company will attempt to quantify the impact, if any, of the failure
to complete any necessary corrective actions. Although the Company cannot
currently estimate the magnitude of such impact, if systems material to the
Company's operations have not been made Year 2000 compliant upon completion of
this phase, the Year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations.
To date, the costs incurred by the Company with respect to this process
were approximately $99,000 in 1998 and approximately $41,000 for the six months
ended June 30, 1999. The Company has continued to purchase and replace
non-compliant equipment and software as part of its continual IT updating
process and has virtually replaced as part of its normal business plan the
majority of all non-compliant equipment. Future costs associated with the Year
2000 process are estimated to be approximately $50,000.
The risk resulting from the failure of third parties in the public and
private sector to attain Year 2000 readiness is the same as other companies in
general. The following are representative of the types of risks that could
result in the event of one or more of the Company's information systems,
laboratories, or facilities failed to be Year 2000 ready, or similar major
failures by one or more major third party suppliers to the Company:
Information systems - could include interruptions or disruptions of
business and transactions processing such as customer billing, payroll,
accounts payable and other operating and information processing, until
systems can be remedied or replaced.
Laboratory facilities - could include interruptions or disruptions of
data management processes and facilities with delays in delivery of
services, until non-compliant conditions or components can be remedied
or replaced.
Major supplier to the Company - could include interruptions or
disruptions of the supply of raw materials, supplies and Year 2000
ready components which could cause interruptions or disruptions and
delays in delivery of services, until the third party suppliers
remedied the problem or contingency measures can be implemented.
The Company believes, based on available information, that it will be
able to manage its total Year 2000 transition without material adverse effect on
its business operations, services or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The Company owns financial instruments that are sensitive to market
risks as part of its investment portfolio of cash equivalents and marketable
securities. The investment portfolio is used to preserve the Company's capital
until it is required to fund operations, including the Company's research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. The Company does not own derivative financial instruments
in its investment portfolio. Due to the nature of the Company's investment
portfolio, the investment portfolio contains instruments that are primarily
subject to interest rate risk.
Interest Rate Risk. The Company's investment portfolio includes fixed
rate debt instruments that are primarily United States government and agency
bonds of durations ranging from one to four years. The market value of these
bonds is subject to interest rate risk, and could decline in value if interest
rates decrease. To mitigate the impact of fluctuations in cash flow, the Company
maintains substantially all of its debt instruments as fixed rate. The portion
maintained as fixed rate is dependent on many factors including judgments as to
future trends in interest rates.
The Company's investment portfolio also includes equity interests in
United States government and agency bond funds. The value of these equity
interests is also subject to interest rate risk.
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 June 30,
1999. The fair values that result from these computations are compared with the
fair values of these financial instruments at June 30, 1999. The differences in
this comparison are the hypothetical gains or losses associated with each type
of risk. The results of the sensitivity analysis at June 30, 1999 are as
follows:
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Interest Rate Sensitivity: A 10% decrease in the levels of interest
rates with all other variables held constant would result in a decrease
in the fair value of the Company's financial instruments by
approximately $255,000 per year. A 10% increase in the levels of
interest rates with all other variables held constant would result in
an increase in the fair value of the Company's financial instruments by
approximately $255,000 per year. The Company maintains a portion of its
financial instruments, including long-term debt instruments of
approximately $7,086,000 at June 30, 1999, at variable interest rates.
If interest rates were to increase 10%, the impact of such instruments
on cash flows or earnings would not be material.
The use of a 10% estimate is strictly for estimation and evaluation
purposes only. The value of the Company's assets may rise or fall by a greater
amount depending on actual general market performances and the value of
individual securities owned by the Company.
The market price of the 7% Convertible 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
approximately $32,881,000 at June 30, 1999 and is lower than the carrying value
by approximately $10,119,000. Market risk was estimated as the potential
decrease in fair value resulting from a hypothetical 1% increase in the
Company's weighted average long term borrowing rate and a 1% decrease in quoted
market prices, or $860,000.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 1999, the Company issued 18,846 shares of its common stock,
$.001 par value per share, to 23 former principal stockholders of ViroTex
Corporation ("ViroTex"). The issuance of the shares was made as partial payment
for the satisfaction of an earn-out event related to ViroTex's external
analgesic product as set forth in the Agreement and Plan of Reorganization dated
November 24, 1998 discussed in the Company's current report on Form 8-K dated
November 24, 1998. The shares were valued at $10.34 per share for purposes of
determining the number of shares to be issued to the principal stockholders of
ViroTex. The issuance of such shares was exempt from registration under Section
4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An annual meeting of the stockholders of the Company was held on April
25, 1999, in Fort Collins, Colorado, for the purpose of re-electing Dr. G. Lee
Southard, C. Rodney O'Connor and H. Stuart Campbell to the Board of Directors as
Class C directors and ratifying the appointment of the Company's independent
auditors.
The following votes were cast by the stockholders with respect to the
election of directors:
Shares Shares Shares
Voted Voted Voted Broker
For Against Abstained Non-Votes
---------- --------- --------- ---------
Dr. G. Lee Southard 9,930,315 1,070,126 0 0
C. Rodney O'Connor 9,836,315 1,164,126 0 0
H. Stuart Campbell 10,065,130 935,311 0 0
The other directors whose term continues after the meeting are John E.
Urheim, Dr. D. Walter Cohen, Dr. Jere E. Goyan, Dr. R. Bruce Merrifield, William
C. O'Neil, Jr. and David R. Bethune.
The following votes were cast by the stockholders with respect to the
resolution to ratify the Board of Directors' selection of Deloitte & Touche LLP
as the Company's independent auditors for the fiscal year ending December 31,
1999:
Shares Shares Shares
Voted Voted Voted Broker
For Against Abstained Non-Votes
---------- ------- --------- ---------
10,373,167 432,457 194,817 0
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 June
30, 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)
July 28, 1999 By: /s/ John E. Urheim
----------------------------------------
John E. Urheim
Vice Chairman of the Board of Directors
and Chief Executive Officer
July 28, 1999 By: /s/ Brian G. Richmond
----------------------------------------
Brian G. Richmond
Vice President--Finance, Assistant
Secretary, and Assistant Treasurer
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27. Financial Data Schedule.