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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to ____________
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Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
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(Title of Class)
Series A Preferred Stock Purchase Rights
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(Title of Class)
Indicate by check mark whether the registrant ( 1 ) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 19, 1999 was $144,102,697.
The number of shares outstanding of the registrant's common stock as of
February 19, 1999 was 11,414,075.
Documents incorporated by reference:
Part III, Items 10, 11, 12 and 13 are incorporated by reference to the
definitive Proxy Statement for the Registrant's Annual Meeting of Shareholders
scheduled to be held on April 25, 1999.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Atrix Laboratories, Inc. (the "Company"), originally named Vipont Research
Laboratories, Inc., was formed in August 1986 as a Delaware corporation. The
Company is engaged primarily in the research, development and commercialization
of a broad range of dental, medical and veterinary products based on its
proprietary biodegradable polymer drug delivery systems. The Company's primary
focus to date has been the ATRIGEL(R) sustained release system. With the recent
acquisition of ViroTex Corporation (see "Recent Developments"), the Company is
also engaged in the research, development and commercialization of complementary
proprietary drug delivery systems that provide topical and transmucosal delivery
of medications requiring fast onset of action. Both ATRIGEL(R) and the topical
and transmucosal drug delivery systems can be engineered for either local or
systemic delivery of a variety of small molecules and peptides, proteins and
vaccines.
ATRIGEL(R) System
The Company's patented ATRIGEL(R) system is comprised of biodegradable
polymer formulations that are administered as flowable compositions (e.g.,
solutions, gels, pastes and putties), which solidify in situ upon contact with
body fluids to form biodegradable implants. The ATRIGEL(R) system is designed to
provide extended localized or systemic drug delivery in a single application,
without the need for surgical implantation or removal. Depending on the intended
use or the specific drug to be delivered via the ATRIGEL(R) system, the release
and degradation rates of the system can be customized. The Company's business
strategy is to develop and commercialize its proprietary ATRIGEL(R) system in
dental, medical and veterinary applications. Key elements of the Company's
business strategy are (i) to focus on the development and commercialization of
periodontal products, (ii) to leverage its proprietary technology, (iii) to
enhance development and commercialization efforts through third party
collaborations, (iv) to expand its product portfolio through the acquisition of
complementary technologies and/or products and (v) to retain manufacturing
control of the Company's proprietary ATRIGEL(R) system.
The Company currently markets two medical device products and two drug
products. The ATRISORB(R) GTR Barrier, a biodegradable film utilizing the
ATRIGEL(R) system, is a medical device used to aid in the guided tissue
regeneration ("GTR") of a tooth's support following periodontal surgery. An
improved version of the GTR barrier, the ATRISORB(R) FreeFlow GTR Barrier, was
introduced in 1998. The Company is also developing the ATRISORB(R)-DOXY product,
a second-generation GTR barrier that combines the benefits of the ATRISORB(R)
GTR Barrier with the antibiotic doxycycline for improved clinical outcomes
following periodontal surgery. The Company commenced pivotal trials for the
ATRISORB(R)-DOXY product in July 1998 and expects to file for regulatory
clearance in 1999. In September 1998, the Company received approval for its
ATRIDOX(R) product, a new minimally invasive pharmaceutical treatment for
periodontitis that employs the ATRIGEL(R) system containing the antibiotic
doxycycline. In the veterinary field, the Company developed a product utilizing
the ATRIGEL(R) system to treat periodontal disease in companion animals, which
is being marketed by Heska Corporation ("Heska").
In December 1996, the Company entered into a commercialization agreement
with Block Drug Corporation ("Block"), a leading marketer of oral healthcare
products. Under the current terms of the agreement (the "Block Agreement"),
Block has acquired the exclusive North American rights to market the ATRIDOX(R)
product, the ATRISORB(R) GTR Barrier and the ATRISORB(R)-DOXY product.
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Non-ATRIGEL(R) Systems
The proprietary drug delivery systems obtained in the acquisition of ViroTex
Corporation ("ViroTex") include three polymer-based drug delivery systems, a
solvent/microparticle drug delivery system and a topical anesthetic depot
delivery system. The polymer based drug delivery systems are the Bioerodible
Mucoadhesive (BEMA(TM)) film, which adheres to the mucosal tissue of the mouth
or vagina and allows the rapid or controlled delivery of medication through the
tissue as the film dissolves away; the Mucocutaneous Absorption (MCA(TM))
system, a moisture resistant, film-forming gel or aerosol that binds drugs to
the skin or mucosal tissue for more efficient drug delivery; and the
Biocompatible Polymer ("BCP(TM)") system, which delivers drug to a wound and
dries to a protective film to create an ideal moist environment for healing. The
Solvent/Microparticle (SMP(TM)) system combines dissolved drug compounds with a
microparticle suspension of the drug in a single formulation, allowing the
medication to be delivered in two stages to improve the absorption of relatively
insoluble active compounds. The Topical Anesthetic Depot ("TAD(TM)") delivery
system is an anesthetic depot that enhances antiviral efficacy to provide
prolonged relief from numbing, pain and itching through sustained delivery of a
local anesthetic. ViroTex's first product, Viractin(R) Cold Sore & Fever Blister
Medicine ("Viractin(R)"), launched in 1996, was developed using this system.
ViroTex subsequently sold all of the rights to Viractin(R) to CEP Holdings, Inc.
in July 1997.
RECENT DEVELOPMENTS
Acquisition of ViroTex Corporation. On November 24, 1998, the Company
acquired ViroTex through the merger of its wholly owned subsidiary, Atrix
Acquisition Corporation, with and into ViroTex. Upon consummation of the
transaction, ViroTex became a wholly owned subsidiary of the Company. ViroTex
commenced operations in May 1988 and developed over-the-counter and prescription
products based on its proprietary drug delivery systems.
Under the Agreement and Plan of Reorganization dated November 24, 1998 (the
"Merger Agreement"), the stockholders of ViroTex received $6,351,867 in cash and
37,860 shares of the Company's common stock, $.001 par value (the "Common
Stock"), valued at $389,958. In addition, the ViroTex stockholders are entitled
to receive additional consideration of up to $3,000,000, payable in shares of
Common Stock or cash, upon satisfaction of certain earn-out events set forth in
the Merger Agreement related to the performance of certain products of ViroTex.
The Company also issued a warrant to purchase 6,750 shares of Common Stock in
replacement of a warrant to purchase shares of ViroTex common stock, and issued
113,229 stock options to purchase shares of Common Stock to replace certain
options held by employees of ViroTex who became employees or consultants of the
Registrant. Only stockholders of ViroTex who beneficially owned more than 1% of
the total outstanding shares of ViroTex, on a fully diluted basis, as of
November 24, 1998, are entitled to receive Common Stock. All other stockholders
received cash in lieu of Common Stock. The consideration paid under the Merger
Agreement was determined through arms-length negotiations between the parties
and the cash portion of the purchase price was funded through the Company's cash
on hand.
In February 1999, the Company completed the transfer of certain equipment
and personal property from ViroTex's facilities in The Woodlands, Texas to the
Company's facilities in Fort Collins, Colorado. The Company closed the Woodland
facility in March 1999.
The foregoing summary of the Merger Agreement does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions of the Merger Agreement filed as an exhibit to this Report.
New Drug Application. On September 4, 1998, the United States Food and Drug
Administration (the "FDA") approved the Company's New Drug Application ("NDA")
for its lead product ATRIDOX(R), a minimally invasive subgingival antibiotic
therapy for chronic adult periodontitis employing the ATRIGEL(R) system with the
antibiotic doxycycline.
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ATRIX TECHNOLOGY
ATRIGEL(R) System. The Company believes the ATRIGEL(R) system addresses many
of the limitations associated with traditional drug delivery technologies. Most
drugs are administered orally or by injection at intermittent and frequent
doses. These routes of administration are not optimal for several reasons,
including difficulty in maintaining uniform drug levels over time, problems with
toxicity and side effects, high costs due to frequent administration and poor
patient compliance. Furthermore, innovations in biotechnology have led to an
increase in the number of protein and peptide drugs under development. These
therapeutics, because of their larger molecular size and susceptibility to
degradation in the gastrointestinal tract, often are required to be administered
by multiple injections, usually in a hospital or other clinical setting. The
ATRIGEL(R) system is compatible with a broad range of pharmaceutical compounds,
including water soluble and insoluble compounds and high and low molecular
weight compounds. In preclinical trials, the Company has demonstrated the
ability of the ATRIGEL(R) system to deliver, both systemically and locally,
various proteins and peptides, including hormones and growth factors. There can
be no assurance, however, that products using the ATRIGEL(R) system will be
successfully developed and approved or cleared for commercial use.
The Company believes that the ATRIGEL(R) system may provide benefits over
traditional methods of drug administration such as tablets or capsules,
injections and continuous infusion as a result of the following properties:
o Safety. All current components of the ATRIGEL(R) system are biocompatible
and have independently established safety and toxicity profiles. The
polymers used in the system are members of a class of polymers some of
which have previously been approved by the FDA for human use in other
applications. The Company has also conducted toxicological studies on the
ATRIGEL(R) system to develop a safety and toxicological profile.
o Broadly Applicable. The ATRIGEL(R) system is compatible with a broad range
of pharmaceutical compounds, including water soluble and insoluble
compounds and high and low molecular weight compounds. In preclinical
models, the Company has demonstrated the ATRIGEL(R) system can be used to
deliver proteins, peptides and other compounds that have formulation
stability issues or short in-vivo half-lives.
o Site Specific Drug Delivery. The ATRIGEL(R) system can be delivered
directly to a target area, thus potentially achieving higher drug
concentrations at the desired site of action and potentially minimizing
systemic side effects. For example, the ATRIDOX(R) product delivers high
concentrations of the antibiotic doxycycline to periodontal pockets with
minimal systemic concentrations of the drug. In preclinical models, the
Company has delivered several cancer drugs directly to tumors, achieving
high local concentrations of the drugs with minimal systemic toxic side
effects.
o Systemic Drug Delivery. The ATRIGEL(R) system also can be used to provide
sustained drug release into the systemic circulation for certain drugs. In
these applications, for example, the entire body requires treatment, and
the drug may not be active when given orally. For example, the Company is
developing an ATRIGEL(R) formulation containing the hormone peptide
leuprolide acetate as a systemic therapy for prostate cancer. In
preclinical models, the Company has demonstrated the systemic delivery of
peptides at therapeutic levels for up to 110 days from a single depot
injection.
o Customized Continuous Release and Degradation Rates. The ATRIGEL(R) system
can be designed to provide continuous release of incorporated
pharmaceuticals over a targeted time period so as to reduce the frequency
of drug administration. In addition, the ATRIGEL(R) system can be designed
to degrade over weeks, months, or even one year.
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o Biodegradability. The ATRIGEL(R) system will biodegrade and is not
expected to require removal when the drug is depleted.
o Ease of Application. The ATRIGEL(R) system can be injected or inserted as
flowable compositions (e.g., solutions, gels, pastes, and putties) by
means of ordinary needles and syringes, or can be sprayed or painted onto
tissues.
In addition to the delivery of drugs, the ATRIGEL(R) system without a drug
has potential uses as a biomaterial for use in medical devices, in which case
the ATRIGEL(R) system has all of the properties described above except those
dependent on the release of a drug.
The Company, through ViroTex, is developing or has developed the following
proprietary drug delivery systems not based on the ATRIGEL(R) system.
Other Polymer-Based Drug Delivery Systems. The Company is developing three
polymer-based drug delivery systems: the Bioerodible Mucoadhesive ("BEMA(TM)")
film, which delivers drug to the mucosal tissue (mouth and vagina) for localized
drug delivery or through buccal tissue for systemic drug delivery; the
Mucocutaneous Absorption ("MCA(TM)") system, which binds a drug to the skin and
mucosal tissue; and the Biocompatible Polymer ("BCP(TM)") system, which forms a
non-constricting, protective film for wound healing and delivers drug to a wound
and the surrounding tissue. The polymers used in the BEMA(TM), MCA(TM) and
BCP(TM) delivery systems are members of a class of polymers which have been
previously approved by the FDA for human use in other applications.
The BEMA(TM) film consists of a bi-layer or multi-layer film that adheres to
mucosal surfaces with little or no foreign body sensation. The BEMA(TM) film is
bioerodible with naturally occurring fluids and can provide drug delivery
through the backing or the adhesive layer. The Company believes the BEMA(TM)
delivery system represents a highly versatile delivery system for both systemic
and localized delivery of drugs, peptides and proteins. The BEMA(TM) film can be
cut into any shape or size, and its set-up time, biodegradability, taste and
thickness all can be modified.
The MCA(TM) delivery system delivers a resilient, strong bonding, moisture
resistant film that can be applied in the form of a gel or aerosol spray. The
Company believes the advantages of the MCA(TM) drug delivery system include its
ability to bind a drug to the skin or mucosal surfaces, to adhere to dry, moist
and wet surfaces, and preferred aesthetics when used on the skin or in the
mouth.
The BCP(TM) delivery system can be applied in liquid or gel form. The
Company believes the advantage of the BCP(TM) delivery system is its ability to
deliver locally a drug or compound to a wound or surrounding tissue, and then
dry to a protective film, creating an ideal environment for wound healing and
protecting against contamination and irritation.
Solvent/Microparticle Drug Delivery System. The Company is developing a
solvent/microparticle ("SMP(TM)") drug delivery system that provides controlled
delivery of a pharmaceutical compound to the skin, even where the skin barrier
is compromised or completely absent, such as in the case of a wound or lesion.
The SMP(TM) delivery system is applied in a gel form and enhances solubility
of relatively water-insoluble compounds. The SMP(TM) delivery system combines
dissolved drug with a microparticle suspension of the drug in a single
formulation. This formulation provides a two staged topical delivery in which
the dissolved drug readily enters the skin while the microparticle drug is
maintained above the top layer of the skin for later (sustained) delivery. The
ratio of dissolved to microparticle drug is adjustable, depending on the drug to
be delivered.
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Topical Anesthetic Depot Delivery System. The proprietary topical anesthetic
depot ("TAD(TM)") delivery system enhances antiviral efficacy and creates a
prolonged anesthetic effect (i.e., numbing, pain and itching relief) through
sustained delivery of a local anesthetic to the skin. The TAD(TM) delivery
system creates a depot of drug at the basal cell layer of the skin, the site at
which the nerve endings interact with the epidermis and the primary site of
viral replication. A double-blinded, placebo-controlled clinical study for the
treatment of recurrent herpes labialis lesions (cold sores and fever blisters)
exhibited a 30% reduction in healing time with an active formulation that
incorporated the TAD(TM) delivery system versus a placebo. The Viractin(R)
product was developed using this delivery system. In connection with the sale of
Viractin(R) to CEP Holdings, Inc., ViroTex transferred all rights, title and
interest to the TAD(TM) delivery system and received an exclusive license to use
the technology in the topical treatment of diseases other than oral herpes
lesions.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table sets forth certain information about the Company's
products and products under development based on the ATRIGEL(R) system.
PRODUCT INDICATION STATUS(1)
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Periodontal Applications:
ATRIDOX(R) Antibiotic therapy for chronic Marketed
periodontitis Launched November 1998
ATRISORB(R)GTR Barrier Tissue regeneration following periodontal Marketed
surgery Launched 1996
ATRISORB(R) Free Flow Tissue regeneration following periodontal Marketed and launched in November
GTR Barrier surgery 1998
ATRISORB(R)-DOXY Tissue regeneration and infection Pivotal clinical trials commenced
reduction following periodontal surgery July 1998
ATRIGEL(R) system with Periodontal regeneration Preclinical development
growth factors
Oncology Applications:
ATRIGEL(R) system with leuprolide Prostate cancer Phase I/II clinical trials began
acetate in 1999
Orthopedic Applications:
ATRIGEL(R) system with growth Tissue and bone regeneration Preclinical development
factors
Veterinary Applications:
Heska Periodontal Therapeutic Periodontitis in companion animals Marketed & launched December 1997
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(1) See "Government Regulation."
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The following table provides a summary of the Company's products and
products under development not based on the ATRIGEL(R) system, including drug
class, anticipated year of introduction and corresponding delivery systems.
PRODUCT INDICATION STATUS(1)
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Dermatological Treatment
SMP(TM) topical dapsone Treatment of acne Phase I clinical trials
Commenced May 1998
BCP(TM) topical antibiotic Infection protection Future OTC product
BCP(TM) wound wash Minor cuts and abrasions Future OTC product
Viractin(R) cream and gel Cold sores and fever blisters OTC, sold to JB Williams July
1997, royalty through July 2002
Mucosal Applications
BEMA(TM) Dyclonine Canker sores and dental pain Future OTC product
MCA(TM) Benzocaine Canker sores Future OTC product
General Applications
BEMA(TM) systemic delivery Several drugs under evaluation Preclinical
MCA(TM) external analgesic Arthritis, muscle pain, bursitis Future OTC product
(1) See "Government Regulation."
PERIODONTAL APPLICATIONS
Periodontal disease is an infection caused by plaque build up on the teeth
and gums. The severity of the disease varies from the mildest cases, clinically
termed gingivitis (bleeding gums) to more severe cases, clinically termed
periodontitis. When gingivitis is not controlled, the disease progresses into
periodontitis, a condition characterized by the progressive, chronic infection
and inflammation of the gums and surrounding tissue. This chronic infection and
inflammation causes destruction of a tooth's supporting structure (bone and
periodontal ligament) and results in the formation of periodontal pockets
(spaces between the gum and tooth). If left untreated, periodontitis will
continue to progress and eventually lead to tooth loss.
Based on published industry reports, the Company believes there are in
excess of 50 million Americans with periodontal disease, and this number is
increasing as a result of the increasing average age of the U.S. population. The
Company believes that only a small percentage of Americans are now being treated
for periodontal disease. In its early stages, progression of the disease is
usually painless, allowing the condition to become advanced before treatment is
sought by the patient. Periodontal disease has no known cure, and effective
treatment is possible only through periodic professional intervention. The most
common treatment, scaling and root planing, requires the dental professional to
anesthetize the gums and then scrape away accumulated plaque and calculus above
and below the gumline. For more serious cases, various forms of gum surgery are
the primary treatment. The Company believes that many individuals do not seek
treatment due to a number of factors including cost, pain, potential medical
complications associated with current therapies, and because the disease is
asymptomatic in its early stages. The Company believes, based on published
industry reports, that over $6.5 billion is spent annually on the treatment of
periodontal disease.
The ATRIDOX(R) Product. The ATRIDOX(R) product employs the ATRIGEL(R) system
and the antibiotic doxycycline to form a product designed to control the
bacteria that cause periodontal disease. The ATRIDOX(R) product is intended to
add a new, minimally invasive pharmaceutical maintenance procedure to current
periodontal treatment. The ATRIDOX(R) product is administered by a periodontist
or a general dentist by inserting the liquid ATRIDOX(R) product into the
periodontal pocket through a cannula. The liquid ATRIDOX(R) product solidifies
in the periodontal pocket and then biodegrades as it releases doxycycline over a
period of seven to ten days. On September 4, 1998 the Company received notice
that the FDA had approved the NDA for the ATRIDOX(R) product.
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In connection with the Block Agreement, Block has the exclusive rights to
market the ATRIDOX(R) product in North America. Block began introducing
ATRIDOX(R) at dental professional meetings in October 1998, and began detailing
ATRIDOX(R) to the U.S. dental profession in November 1998. The Company is
currently considering various arrangements with respect to the marketing of the
ATRIDOX(R) product in Europe.
ATRISORB(R) GTR Barrier. The ATRISORB(R) GTR Barrier is a biodegradable,
liquid polymer product that utilizes the ATRIGEL(R) system to aid in the
regeneration of a tooth's support following osseous flap surgery or other
periodontal procedures. Osseous flap surgery, a common treatment for severe
cases of periodontal disease, involves cutting a flap of gum tissue to expose
and debride areas not reachable by conventional scaling and root planing
procedures. The Company estimates that there are currently over 2 million flap
surgeries performed each year in the United States. Published research has shown
that to obtain optimal healing following flap surgery, it is necessary to
isolate the wound healing site from the adjacent gum tissue. The placement of a
barrier that isolates the surgical site from the gum tissue has been shown to
selectively facilitate growth of the periodontal ligament cells, leading to
connective tissue and bone regeneration at the base of the periodontal defects.
The ATRISORB(R) GTR Barrier is formed outside of the mouth using a sterile,
single-use barrier forming kit. Once placed in the mouth over the periodontal
defect, the semi-solid ATRISORB(R) GTR Barrier further solidifies upon contact
with oral fluids to form a solid barrier that isolates the healing site in order
to promote guided tissue regeneration. Sutures are not required to hold the
barrier in place, which allows the ATRISORB(R) GTR Barrier to be placed in a
shorter time relative to existing guided tissue regeneration barrier products.
In addition, periodontists have the potential for treatment of multiple diseased
sites in one surgical session and can form multiple barriers from a single kit,
thereby reducing the inventory requirements and costs. Since the ATRISORB(R) GTR
Barrier is biodegradable, a second surgery to remove the barrier is unnecessary.
On March 22, 1996, the Company received a 510(k) premarket notification
clearance from the FDA to market the ATRISORB(R) GTR Barrier in the United
States. The Company received the CE Mark for the ATRISORB(R) product in December
1997, increasing from eight to seventeen countries in Europe where the product
is cleared for sale. The CE Mark approval included a new in situ application
technique allowing the direct placement of the liquid on bone graft material. On
September 9, 1998 the Company received a 510(k) premarket notification clearance
from the FDA to market this improved version of the ATRISORB(R) GTR Barrier in
the United States, where it is being sold by Block as the ATRISORB(R) FreeFlow
GTR Barrier. As of December 31, 1998 the Company had received clearance to
market the ATRISORB(R) GTR Barrier in 29 foreign countries, with 3 applications
pending. The Company expects to market the product in additional foreign
countries; however, there can be no assurance that additional regulatory
approvals or clearances will be obtained.
The Company commenced commercial sales of the Atrisorb(R) GTR Barrier in the
United States in the third quarter of 1996. Under the Block Agreement, Block has
the exclusive rights to market the ATRISORB(R) GTR Barrier in North America. The
Company currently markets the ATRISORB(R) GTR Barrier in Europe through
independent distributors and is considering various marketing arrangements at
this time. See "Collaborations."
The ATRISORB(R)-DOXY Product. The ATRISORB(R)-DOXY product is under
development by the Company to address infections following periodontal surgery.
It has been shown clinically that post operative infections often lead to less
than optimum healing. Medicinal agents such as doxycycline can be incorporated
into the ATRISORB(R) GTR Barrier, which the Company believes could provide a
drug delivery capability not feasible with other barriers currently on the
market. As a result, the Company believes the ATRISORB(R)-DOXY product will
contribute to better healing of the surgical site. The Company commenced a
pivotal clinical trial of the ATRISORB(R)-DOXY product in July 1998. If clinical
trials are successful, and if the ATRISORB(R)-DOXY product is approved for sale
by the FDA, Block has the exclusive rights to market this product in North
America.
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ATRIGEL(R) System with Growth Factors. The Company is currently
investigating the use of the ATRIGEL(R) system with a variety of growth factors
to treat periodontal defects where there exists no current effective therapy. In
preclinical studies, the ATRIGEL(R) system demonstrated that certain growth
factors could be delivered during periodontal osseous flap surgery to regenerate
periodontal attachment in a manner superior to controls.
ONCOLOGY APPLICATIONS
The Company believes the ATRIGEL(R) system is well suited for the local
delivery of certain anti-cancer agents and has the potential to capitalize on
the potency of these drugs while diminishing the systemic side effects
associated with them. The Company believes that the ATRIGEL(R) system can
release active drug agents into solid tumors at higher concentrations and for
extended periods of time while maintaining lower systemic levels of drug than
generally can be achieved with injection or intravenous delivery.
The Company also believes that there are a number of potential systemic
cancer therapies that are compatible with the ATRIGEL(R) technology. The
Company's first such systemic application for the ATRIGEL(R) system in oncology
is prostate cancer.
ORTHOPEDIC APPLICATIONS
The Company is pursuing the use of its ATRIGEL(R) system to deliver tissue
growth factors for a variety of product applications, including the healing of
bone fractures and defects and the treatment of dermal ulcers and other soft
tissue wounds. In the area of orthopedics, the Company is initially focusing on
the development of the ATRIGEL(R) system for bone regeneration and orthopedic
post-operative pain.
In 1996, the Company conducted preclinical trials which showed that a
combination of tissue growth factors could be incorporated into the ATRIGEL(R)
system and released at controlled rates for extended periods of time. For
example, when the ATRIGEL(R) formulation containing bone growth factors was
applied to a bone defect in preclinical studies, the amount of new bone formed
was increased significantly over that obtained in control groups. The Company
continues to evaluate a number of different growth factors.
VETERINARY APPLICATIONS
In 1995, the Company signed an exclusive worldwide license agreement with
Heska to develop a product to treat periodontal disease in companion animals.
Under the terms of the agreement, the Company developed a subgingival therapy
for periodontal disease in dogs and cats, comprised of the antibiotic
doxycycline and the ATRIGEL(R) system. A New Animal Drug application ("NADA")
was approved for this product on November 19, 1997 and the product was launched
in December 1997. Heska has the worldwide rights to market this product, which
is manufactured exclusively by the Company.
DERMATOLOGY
The Company is currently developing a proprietary prescription acne product
that incorporates the novel anti-inflammatory and antimicrobial drug dapsone
into the SMP(TM) drug delivery system. The Company has completed product
formulation and stability studies, GMP manufacturing, preclinical irritation and
toxicity studies, and in vitro skin permeation studies for such product. Phase I
clinical trials of this product commenced in the second quarter of 1998.
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COLLABORATIONS
Block Drug Agreement. On December 17, 1996, the Company entered into the
Block Agreement pursuant to which Block acquired exclusive rights to market the
ATRISORB(R) GTR Barrier products and the ATRISORB(R)-DOXY product, when and if
approved, in North America, and the rights to market the ATRIDOX(R) product in
the United States, with an option to acquire the rights to market the ATRIDOX(R)
product in Canada and certain European countries. On September 12, 1997, Block
exercised its option to market the ATRIDOX(R) product in Canada, but let its
option lapse with respect to Europe.
Under the Block Agreement, Block is responsible for sales and marketing for
the products and will advise, consult and may financially support various
aspects of the Company's dental research and development program. The Company
also has the right to co-market the products if certain annual sales levels are
not met. The Block Agreement provides for both milestone and royalty payments to
the Company. The Block Agreement expires on a product-by-product and a
country-by-country basis upon the expiration of the last applicable patent or
loss of patent protection for a product in a given country. The first patent
will expire in 2012. In addition, Block may terminate the Block Agreement at any
time without cause upon 12-months written notice to the Company, if the Company
commits a willful and material breach of the Block Agreement, or if the Company
ceases to manufacture or supply the product to Block pursuant to the Block
Agreement. The Company may terminate the Block Agreement if Block fails to make
any required payment, if Block commits a willful and material breach of the
Block Agreement, if Block ceases to offer the product for distribution, or if
Block markets, distributes or sells a competitive product.
PATENTS AND TRADEMARKS
The Company considers patent protection and proprietary position to be
materially significant to its business. As of December 31, 1998, the Company
maintained 30 United States patents and 18 foreign patents, and has 25 United
States and 40 foreign patent applications pending. A total of 3 U.S. patents and
14 U.S. pending patent applications are attributed to the acquisition of ViroTex
during 1998. Claims contained in these patents and pending patent applications
protect the Company's drug delivery technology and products based upon these
technologies. These include the ATRIGEL(R) system developed by the Company, the
BEMA(TM), MCA(TM), BCP(TM), and SMP(TM) technologies acquired through the
acquisition of ViroTex, and the ATRISORB(R) GTR Barrier, ATRISORB(R) FreeFlow,
and the ATRIDOX(R) products currently manufactured by the Company.
Notwithstanding the Company's pursuit of patent protection, there is no
assurance that others will not develop delivery systems, compositions and/or
methods that infringe the Company's patent rights resulting from outright
ownership or non-revocable exclusive licensure of patents that relate to the
Company's delivery systems, composition and/or methods. In that event, such
delivery systems, compositions and methods may compete with the Company's
systems, compositions and methods and may adversely affect the operations of the
Company. Further, there is no assurance that patent protection will afford
adequate protection against competitors with similar systems, composition or
methods, nor is there any assurance that the patents will not be infringed or
circumvented by others. Moreover, it may be costly to pursue and to prosecute
patent infringement actions against others, and such actions could hamper the
business of the Company. The Company also relies on its unpatented proprietary
knowledge. No assurance can be given that others will not be able to develop
substantially equivalent proprietary knowledge or otherwise obtain access to the
Company's knowledge, or that the Company's rights under any patents will afford
sufficient protection.
In addition to patents, the Company also maintains several U.S. and numerous
foreign trademark and service mark applications for registrations of its name,
logo, drug delivery systems and products. These include 7 U.S. and 16 foreign
issued trademarks with 3 U.S. and 22 foreign applications pending. The 3 U.S.
pending trademark applications are attributed to the ViroTex purchase.
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COMPETITION
The biotechnology and pharmaceutical industries are characterized by rapidly
evolving technology and intense competition. The Company's competitors include
major pharmaceutical, chemical and specialized biotechnology companies, many of
which have financial, technical and marketing resources significantly greater
than those of the Company. In addition, many specialized biotechnology companies
have formed collaborations with large, established pharmaceutical companies to
support research, development and commercialization of products that may be
competitive with those of the Company. Moreover, from time to time, there have
been research reports from various sources describing other sustained release
drug delivery systems for use in treating periodontal disease. Further, the
Company is aware that other companies are developing products that may compete
with the Company's products. There can be no assurance that product
introductions or developments by others will not render the Company's products
or technologies obsolete or place them at a competitive disadvantage.
Products utilizing the Company's proprietary drug delivery systems are
expected to compete with other products for specified indications, including
drugs marketed in conventional and alternative dosage forms. New drugs or
further developments in alternative drug delivery methods may provide greater
therapeutic benefits for a specific drug or indication, or may offer comparable
performance at lower cost, than those offered by the Company's drug delivery
systems. The Company expects proprietary products approved for sale to compete
primarily on the basis of product safety, efficacy, patient convenience,
reliability, availability and price. There can be no assurance that product
introductions or developments by others will not render the Company's expected
products or technologies noncompetitive or obsolete.
GOVERNMENT REGULATION
The research and development, preclinical studies and clinical trials, and
ultimately, the manufacturing, marketing and labeling of the Company's products,
are subject to extensive regulation by the FDA and other regulatory authorities
in the United States and other countries. The United States Food, Drug and
Cosmetic Act ("FD&C Act") and the regulations promulgated thereunder govern,
among other things, the testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, approval, clearance, advertising and promotion of the
Company's products. Preclinical study and clinical trial requirements and the
regulatory approval process typically take years and require the expenditure of
substantial resources. Additional government regulation may be established that
could prevent or delay regulatory approval or clearance of the Company's
products. Delays or rejections in obtaining regulatory approvals or clearances
would adversely affect the Company's ability to commercialize any product the
Company develops and the Company's ability to receive product revenues. If
regulatory approval or clearance of a product is granted, the approval or
clearance may include significant limitations on the indicated uses for which
the product may be marketed.
FDA REGULATION -- APPROVAL OF THERAPEUTIC PRODUCTS
The Company's ATRIDOX(R) product is regulated in the United States as a
drug. The steps ordinarily required before a drug may be marketed in the United
States include (a) preclinical and clinical studies, (b) the submission to the
FDA of an Investigational New Drug Application ("IND"), which must become
effective before human clinical trials may commence, (c) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug, (d) the submission to the FDA of an NDA, and (e) FDA approval of the
application, including approval of all labeling. Preclinical tests include
laboratory evaluation of product chemistry and formulation, as well as animal
studies to assess the potential safety and efficacy of the product. Preclinical
tests must be conducted in compliance with Good Laboratory Practice regulations.
The results of preclinical testing are submitted to the FDA as part of an IND. A
30-day waiting period after the filing of each IND is required prior to the
commencement of clinical testing in humans. In addition, the FDA may, at any
time during this 30-day period, or anytime thereafter, impose a clinical hold on
proposed or ongoing clinical trials. If the FDA imposes a clinical hold,
clinical trials cannot commence or recommence without FDA authorization.
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Clinical trials to support NDAs are typically conducted in three sequential
phases, but the phases may overlap. In Phase I, the initial introduction of the
drug into healthy human subjects or patients, the drug is tested to assess
metabolism, pharmacokinetics and pharmacology and safety, including side effects
associated with increasing doses. Phase II usually involves studies in a limited
patient population to (i) assess the efficacy of the drug in specific, targeted
indications, (ii) assess dosage tolerance and optional dosage and (iii) identify
possible adverse effects and safety risks. If a compound is found to be
potentially effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to further demonstrate clinical
efficacy and to further test for safety within an expanded patient population at
several study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specified time period, if
at all, with respect to any of the Company's products subject to such testing.
After successful completion of the required clinical testing, generally an
NDA is submitted. Once the submission is accepted for filing, the FDA begins an
in-depth review of the NDA. Under the FD&C Act, the FDA has 180 days in which to
review the NDA and respond to the applicant. The review is often significantly
extended by FDA requests for additional information or clarification regarding
information already provided in the submission. The FDA may refer the
application to an appropriate advisory committee, typically a panel of
clinicians, for review, evaluation and a recommendation as to whether the
application should be approved. The FDA is not bound by the recommendation of an
advisory committee. If the FDA evaluations of the NDA and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the NDA. When and if those conditions
have been met to the FDA's satisfaction, the FDA will issue an approval letter.
If the FDA's evaluation of the NDA or manufacturing facility is not favorable,
the FDA may refuse to approve the NDA or issue a not approvable letter, and
often requiring additional testing or information. Even if regulatory approval
is obtained, a marketed product and its manufacturing facilities are subject to
continual review and periodic inspections. In addition, identification of
certain side effects after a drug is on the market or the occurrence of
manufacturing problems could cause subsequent withdrawal of approval,
reformulation of the drug, additional preclinical testing or clinical trials and
changes in labeling.
In March 1997, the Company submitted an NDA with the FDA for the ATRIDOX(R)
product. The Company's NDA was accepted for filing by the FDA in June 1997. The
Company filed the NDA based on the results of pivotal Phase III trials, which
were completed in May 1996 and included data from 822 patients at 20 study
sites. The Company received approval of the NDA on September 4, 1998.
Failure to comply with FDA or other applicable regulatory requirements may
subject a company to administrative sanctions or judicially imposed sanctions
such as civil penalties, criminal prosecution, injunctions, product seizure or
detention, product recalls, or total or partial suspension of production. In
addition, noncompliance may result in the FDA's refusal to approve pending NDAs
or supplements to approved NDAs, premarket approval application ("PMA") or PMA
supplements and the FDA's refusal to clear 510(k)s.
FDA REGULATION -- APPROVAL OF MEDICAL DEVICES
The Company's ATRISORB(R) GTR Barrier product is regulated in the United
States as a medical device. New medical devices are generally introduced to the
market based on a premarket notification or 510(k) submission to the FDA in
which the sponsor establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device or to a
Class III device for which the FDA has not required premarket approval. If the
sponsor cannot demonstrate substantial equivalence, the sponsor will be required
to submit a PMA, which generally requires preclinical and clinical trial data,
to prove the safety and effectiveness of the device. The Company has received
510(k) clearances from the FDA for the ATRISORB(R) GTR Barrier and the
ATRISORB(R) FreeFlow GTR Barrier, and is currently marketing these products in
the United States.
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FDA REGULATION -- POST-APPROVAL REQUIREMENTS
Even if regulatory clearances or approvals for the Company's products are
obtained, its products and the facilities manufacturing the Company's products
are subject to continued review and periodic inspection by the FDA. Each U.S.
drug and device manufacturing establishment must be registered with the FDA.
Domestic manufacturing establishments are subject to biennial inspections by the
FDA and must comply with the FDA's current Good Manufacturing Practices ("cGMP")
regulations if the facility manufactures drugs, and Quality System Regulations
("QSR") regulations if the facility manufactures devices. In complying with cGMP
and QSR, manufacturers must expend funds, time and effort in the area of
production and quality control to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing.
Labeling and promotional activities are regulated by the FDA. The Company
must also report certain adverse events involving its drugs and devices to the
FDA under regulations issued by the FDA.
EUROPEAN REGULATION -- APPROVAL OF MEDICINAL PRODUCTS
In 1993, legislation was adopted which established a new and amended system
for the registration of medicinal products in the European Union ("EU"). A
significant purpose of this system is to prevent the existence of essentially
separate national approval systems which have been a major obstacle to
harmonization. One of the most significant features of this new system is the
establishment of a new European Agency for the Evaluation of Medicinal Products
("EMEA"). Under this new system, marketing authorization, broadly speaking, may
be submitted at either a centralized, a decentralized or a national level.
The centralized procedure is administered by the EMEA; this procedure is
mandatory for the approval of biotechnology products and available at the
applicant's option for other products. The centralized procedure provides for
the first time in the EU for the grant of a single marketing authorization which
is valid in all EU Member States.
A mutual recognition procedure is available at the request of the applicant
for all medicinal products which are not subject to the centralized procedure,
under the so-called "decentralized procedure." The decentralized procedure
creates a new system for mutual recognition of national approvals and
establishes procedures for coordinated EU action on product suspensions and
withdrawals. Under this procedure, the holder of a national marketing
authorization for which mutual recognition is sought may submit an application
to one or more Member States, certifying that identical dossiers are being
submitted to all Member States for which recognition is sought. Within 90 days
of receiving the application and assessment report, each Member State must
decide whether to recognize the approval. The procedure encourages Member States
to work with applicants and other regulatory authorities to resolve disputes
concerning mutual recognition. If such disputes cannot be resolved within the
90-day period provided for review, the application will be subject to a binding
arbitration procedure.
The Company has chosen a decentralized procedure that utilizes a mutual
recognition process for European regulatory filings and submitted the regulatory
dossier to the Medicines Control Agency in the United Kingdom in October 1997.
However, there can be no assurance that the chosen regulatory strategy will
secure regulatory approvals or approvals of the applications submitted by the
Company.
EUROPEAN REGULATION -- APPROVAL OF MEDICAL DEVICES
The Company's ATRISORB(R) GTR Barrier is regulated in Europe as a medical
device. The EU has promulgated rules that require medical devices received by
mid-June 1998 the right to affix the CE Mark, an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. Failure to receive the right to affix the CE Mark
will prohibit a company from selling products in Member States of the EU. The
Company has been certified as being in compliance with the ISO 9000 standards,
one of the CE Mark certification prerequisites, and received the CE Mark for the
ATRISORB(R) GTR Barrier in December 1997.
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REGULATORY CONSIDERATIONS FOR OTC DRUG PRODUCTS
An over-the-counter drug ("OTC") may be lawfully marketed in one of three
ways: (i) the drug is generally recognized as safe and effective ("GRAS/E"),
(ii) the drug is the subject of an approved NDA or (iii) the drug complies with
a Tentative Final or Final Monograph published by FDA as part of the OTC Review.
Prior FDA approval is required only if an NDA is submitted. A company makes the
determination as to which route to market is the most appropriate. If a company
determines that the drug product is GRAS/E or is covered in a monograph, it is
the company's responsibility to substantiate the safety and efficacy of the
formulation and that the dosage form and claims are applicable under GRAS/E or
monograph status. Most OTC drug products are marketed pursuant to an FDA
monograph.
There are several other regulatory requirements applicable to all OTC drug
products. These requirements pertain to labeling, drug registration and listing,
and manufacturing. With regard to labeling, the regulations require certain
language for statement of identity, net contents, adequate directions for use,
and name and address of the manufacturer, and their placement on the finished
package, as well as additional warning statements when relevant to the product.
All OTC manufacturers must register their establishments with the FDA and submit
to the FDA a list of products made within 5 days after beginning operations, as
well as a list of products in commercial distribution. All registered
establishments must be inspected by the FDA at least every 2 years. Lastly, OTC
drug products must be manufactured in accordance with cGMP regulations. If the
FDA finds a violation of cGMPs, it may enjoin a company's operations, seize
product, or criminally prosecute the manufacturer.
ADDITIONAL REGULATORY ISSUES
Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
patent that claims a product, use or method of manufacture covering drugs and
certain other products may be extended for up to five years to compensate the
patent holder for a portion of the time required for research and the FDA review
of the product. This law also establishes a period of time following approval of
a drug during which the FDA may not accept or approve applications for certain
similar or identical drugs from other sponsors unless those sponsors provide
their own safety and effectiveness data. There can be no assurance that the
Company will be able to take advantage of either the patent term extension or
marketing exclusivity provisions of this law.
The National Institute of Health has been requested by the Department of
Health and Human Services to submit proposals for addressing potential conflicts
of interest in the biomedical research sector. Although the proposal request is
aimed at establishing rules to treat potential abuses in the system without
imposing unnecessary burdens and disincentives, there can be no assurance that
any rules adopted will not adversely affect the Company's ability to obtain
research grants. Various aspects of the Company's business and operations are
regulated by a number of other governmental agencies including the Occupational
Safety and Health Administration and the Securities and Exchange Commission.
THIRD PARTY REIMBURSEMENT
The cost of a significant portion of medical care in the United States is
funded by government and private insurance programs, such as Medicare, Medicaid,
health maintenance organizations and private insurers, including Blue Cross/Blue
Shield plans. Governmental imposed limits on reimbursement of hospitals and
other health care providers (including dental practitioners) have significantly
impacted their spending budgets. Under certain government insurance programs, a
health care provider is reimbursed a fixed sum for services rendered in treating
a patient, regardless of the actual charge for such treatment. Private
third-party reimbursement plans are also developing increasingly sophisticated
methods of controlling health care costs through redesign of benefits and
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exploration of more cost-effective methods of delivering health care. In
general, these government and private measures have caused health care providers
to be more selective in the purchase of medical products.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and there can be no assurance that adequate
third-party coverage will be available. Limitations imposed by government and
private insurance programs and the failure of certain third-party payers to
fully or substantially reimburse health care providers for the use of the
products could have a material adverse effect on the Company.
EMPLOYEES
As of December 31, 1998, the Company employed 114 employees on a full-time
basis and one person on a part-time basis. Of the 114 full-time employees, 99
are engaged in production, research and clinical testing and the remaining 15
are in administrative capacities. Sixteen employees have earned doctorate or
advanced degrees. None of the Company's employees are represented by a union or
collective bargaining unit and management considers relations with employees to
be good.
ADDITIONAL INFORMATION
Compliance with federal, state and local law regarding the discharge of
materials into the environment or otherwise relating to the protection of the
environment has not had, and is not expected by the Company to have, any adverse
effect upon capital expenditures, earnings or the competitive position of the
Company. The Company is not presently a party to any litigation or
administrative proceeding with respect to its compliance with such environmental
standards. In addition, the Company does not anticipate being required to expend
any funds in the near future for environmental protection in connection with its
operations.
The Company does not believe that any aspect of its business is
significantly seasonal in nature.
No significant portion of the Company's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
United States Government.
The Company currently obtains supplies of the polymer used in the polymer
delivery system from three separate sources. Supplies of doxycycline are
obtained from both domestic and foreign sources. The Company believes that, in
the event that it should lose any of its suppliers of raw materials, it could
locate and obtain such raw materials from other available sources without
substantial adverse delay or increased expense.
ITEM 2. PROPERTIES.
The Company leases approximately 25,200 square feet of office and research
laboratory space located in Fort Collins, Colorado, pursuant to a lease that
expires on June 1, 2003. The Company has a one time right to terminate this
lease on June 1, 2000. In addition, the Company leases an additional 4,000
square feet of space at the same location for preclinical and initial
manufacturing activities, pursuant to a lease which expires on December 1, 1999.
The Company owns a 24,800 square foot manufacturing facility in Fort Collins
which it acquired in July 1996. As part of the building acquisition, the Company
acquired two acres of vacant land, directly adjacent to the building. In August
1997, the Company acquired an additional 2.7 acres for possible future
development or expansion of the Company.
The Company owns substantially all of its laboratory and manufacturing
equipment, which it considers to be adequate for its research, development and
testing requirements for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders through
the solicitation of proxies during the fourth quarter of the Company's most
recent year.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is traded on The Nasdaq Stock Market under the symbol
"ATRX". The following table sets forth, for the fiscal periods indicated, the
range of high and low sales price per share of Common Stock, as reported on The
Nasdaq Stock Market:
High Low
---- ---
1998:
First Quarter $19 7/8 $ 12 1/4
Second Quarter 21 1/4 13 1/8
Third Quarter 16 1/2 11
Fourth Quarter 13 1/2 7 5/8
1997:
First Quarter $14 1/2 $ 10 1/8
Second Quarter 12 1/4 9
Third Quarter 22 1/4 11
Fourth Quarter 23 7/8 12 3/8
As of March 5, 1999, there were approximately 2,990 holders of record of the
Common Stock.
The Company has never paid cash dividends. The Company currently anticipates
that it will retain all available funds for use in the operation of its business
and does not anticipate paying any cash dividends in the foreseeable future.
RECENT STOCK SALES
In connection with the ViroTex acquisition, the Company issued 37,860 shares
of Common Stock, valued at $10.30 per share, to eleven principal stockholders of
ViroTex, as partial consideration for the cancellation of their shares under the
Merger Agreement. The Company also issued a warrant to purchase 6,750 shares of
Common Stock at an exercise price of $12.94 per share, which expires on April
28, 2000 in replacement of a warrant to purchase shares of common stock of
ViroTex. The foregoing transactions were made in reliance on the exemption from
the registration requirements of the Securities Act of 1933, as amended,
provided by Section 4(2).
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ITEM 6. SELECTED FINANCIAL DATA.
The financial data presented below is derived from the financial statements
of the Company, which has been audited and reported upon by Deloitte & Touche
LLP, independent auditors. The selected financial information set forth in the
table below is not necessarily indicative of the results of future operations of
the Company and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements, related notes and independent auditors' report, included herein.
Year Year Year Year Year
Ended Ended Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In thousands, except per share data)
Summary of Operations:
Total revenues $ 21,073 $ 9,849 $ 1,640 $ 580 $ 713
Total expenses (19,996) (15,105) (14,328) (14,212) (7,355)
Other income (expense) 404 1,389 1,256 974 1,102
Income tax expense (48) -- -- -- --
Extraordinary gain
on extinguishment of debt 257 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ 1,690 $ (3,867) $(11,432) $(12,658) $ (5,540)
======== ======== ======== ======== ========
Basic and diluted per common share:
Income (loss) before
extraordinary item $.13 $(.35) $(1.13) $(1.58) $(.72)
Extraordinary item .02 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $.15 $(.35) $(1.13) $(1.58) $(.72)
======== ======== ======== ======== ========
Basic and diluted weighted
average shares outstanding 11,270 11,134 10,147 8,002 7,741
======== ======== ======== ======== ========
Balance Sheet Data:
Working capital $ 63,121 $ 67,229 $ 24,669 $ 10,913 $ 12,616
Total assets 79,480 78,294 38,463 14,894 22,006
Long-term obligations 48,500 50,000 -- -- --
Shareholders' equity 28,422 26,703 30,284 12,807 21,191
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ITEM 7. 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 Operation, as well as information contained elsewhere in this
Report, contains statements that constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. These statements include
statements regarding the intent, belief or current expectations of 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 as set forth under "Risk
Factors" below. Forward-looking statements are not guarantees of future
performance and involve risks and uncertainties and actual results may differ
materially from those projected in the forward-looking statements as a result of
various factors.
OVERVIEW
Since its inception, the Company has devoted its efforts and resources
primarily to research and development of dental products. The Company has
sustained losses in each year of its operations prior to 1998. The Company
realized a net profit in 1998 primarily as a result of earning $17 million in
milestone revenue from Block. The Block Agreement provides for potential
milestone payments totaling up to $50 million to the Company over a
three-to-five year period, as well as manufacturing margins and royalties on
sales. As of December 31, 1998, the Company had recognized approximately $24.1
million in milestone revenue from Block.
On November 24, 1998, the Company acquired ViroTex through a reverse
subsidiary merger, resulting in ViroTex becoming a wholly-owned subsidiary of
the Company. In connection with the transaction the Company recorded intangible
assets of approximately $3,975,000 (made up of purchased technology, purchased
royalty rights and goodwill) and a charge to income for purchased in-process
research and development, in the amount of $3,050,000. The $3,050,000 charge to
income for purchased in-process research and development was based upon an
independent third party valuation using assumptions and methodologies commonly
used by companies in calculating such charge to income. The Securities and
Exchange Commission is reviewing the assumptions and methodology commonly used
by companies in calculating such charges to income. While the Company believes
that it has followed the Securities and Exchange Commission's guidelines in the
valuation of in-process research and development, there can be no assurance that
it has done so and if the Securities and Exchange Commission challenges such
charges to income, the Company may be required to reclassify such charges to
income.
As a result of the ViroTex acquisition, the Company obtained four polymer-
and solvent-based drug delivery technologies and four near-term OTC products for
oral care and skin care, as well as two prescription products ready to enter
Phase I Clinical Trials for oral care and severe acne. ViroTex's first product,
Viractin(R) Cold Sore & Fever Blister Medicine ("Viractin(R)"), launched in
1996, was developed using this system. ViroTex subsequently sold all of the
rights to Viractin(R) to CEP Holdings, Inc. in July 1997. The Company will
continue to receive royalty payments on the sale of Viractin(R) through
September 30, 2002. The Company believes the acquisition of ViroTex
significantly strengthens the Company's research and development base, and
creates both immediate and long-term opportunities to provide enabling
bio-degradable drug delivery systems for a variety of medical, dental and
veterinary applications.
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The Company anticipates that expenses for the year ending December 31, 1999
will increase as a result of increasing costs for product development,
preclinical and clinical testing, regulatory affairs, manufacturing, commercial
distribution activities, and general and administrative activities associated
with the ATRIDOX(R) product, the ATRISORB(R) FreeFlow GTR Barrier, the
ATRISORB(R) GTR Barrier and future products.
At December 31, 1998 the Company had available for Federal income tax
purposes net operating loss carryforwards of approximately $42 million and
approximately $1.6 million in research and development tax credits. These
carryforwards will expire through 2012. The Company's ability to utilize its net
operating loss, alternative minimum tax, and research and development credit
carryforwards is subject to an annual limitation in future periods pursuant to
the "change in ownership" rules under Section 382 of the Internal Revenue Code
of 1986, as amended.
The Company operates in a single reportable segment and all revenues from
customers are from a similar group of periodontal products. Sales and milestone
revenues from one customer amounted to $19,028,000 and $8,213,000 for the years
ended December 31, 1998 and 1997, respectively. Contract revenues from three
customers amounted to $198,000, $235,000 and $270,000 for the year ended
December 31, 1996. Revenues from export sales to foreign customers amounted to
approximately $557,000, $100,000 and $124,000 for the years ended December 31,
1998, 1997 and 1996 respectively.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
Total revenues for the year ended December 31, 1998 were approximately
$21,073,000 compared to approximately $9,849,000 for the year ended December 31,
1997, representing a 114% increase. The increase was primarily due to
$17,000,000 earned in milestone revenue under the Block Agreement in 1998.
ATRIDOX(R) product sales and ATRISORB(R) FreeFlow GTR Barrier product sales,
both commencing September 1998 also contributed to the increase in total
revenues.
The Company had revenue from product sales of approximately $3,451,000 for
the year ended December 31, 1998 compared to approximately $1,895,000 for the
year ended December 31, 1997, representing a 82% increase. The increase in sales
was primarily the result of the market launch in September 1998 of the
ATRIDOX(R) product and the ATRISORB(R) FreeFlow GTR Barrier product.
Contract revenue represents revenue the Company received from grants and
from unaffiliated third parties for performing contract research and development
activities utilizing the ATRIGEL(R) system, and was approximately $622,000 for
the year ended December 31, 1998, compared to approximately $854,000 for the
year ended December 31, 1997, representing a 27% decrease. The decrease was
primarily due to the completion of several research contracts during 1997.
Sale of marketing rights represents milestone revenue the Company received
pursuant to the Block Agreement during the year ended December 31, 1998. The
Company expects to receive additional future revenue upon the achievement of
other milestones under the Block Agreement, which could result in substantial
payments.
Cost of goods sold was approximately $2,250,000 for the year ended December
31, 1998 compared to approximately $1,533,000 for the year ended December 31,
1997, representing a 47% increase. The increase was primarily related to sales
19
21
commencing in September 1998 for both the ATRIDOX(R) product and the ATRISORB(R)
FreeFlow GTR Barrier product.
Research and development expenses, which included activities for ATRIDOX(R)
and other research activities, were approximately $12,189,000 for the year ended
December 31, 1998 compared to approximately $11,545,000 for the year ended
December 31, 1997, representing a 6% increase. The increase was primarily a
result of additional expenditures in new areas of research using the Company's
existing technology.
The Company expensed $3,050,000 of the ViroTex purchase price, which was
allocated to purchased in-process research and development projects, as of the
date of acquisition. The charge to income was based upon an independent third
party valuation.
Administrative and marketing expenses were approximately $2,507,000 for the
year ended December 31, 1998 compared to approximately $2,027,000 for the year
ended December 31, 1997, representing a 24% increase. The primary reason for
this increase was administrative costs associated with the preparation for the
ATRIDOX(R) market launch.
Investment income for the year ended December 31, 1998 was approximately
$3,938,000 compared to approximately $1,726,000 for the year ended December 31,
1997, representing a 128% increase. Investment income increased due to additions
in principal investments as a result of the proceeds from the sale of the
Company's 7% Convertible Subordinated Notes (the "Notes"), which was completed
in the fourth quarter of 1997, and the milestone payments received under the
Block Agreement during 1998. The majority of the funds were invested in U.S.
government bond funds, long-term U.S. government and government agency
investments. The remaining cash and cash equivalents were invested in interest
bearing accounts and commercial paper to fund the Company's short-term
operations.
Interest expense for the year ended December 31, 1998 was approximately
$3,575,000 compared to approximately $307,000 for the year ended December 31,
1997 representing a 1064% increase. The increase was due to the interest expense
on the Notes.
In December 1998, the Company repurchased $1,500,000, or 3%, of the Notes on
the open market for $1,192,500. As a result, the Company reduced deferred
finance charges by approximately $51,000 on a pro-rated basis and recognized an
extraordinary gain of approximately $257,000. As of December 31, 1998,
$48,500,000 of the Notes are outstanding.
In January 1999, the Company repurchased $3,000,000, or 6%, of the Notes for
$2,250,000. As a result, the Company recognized an extraordinary gain of
approximately $650,000, net of deferred finance charges of $100,000.
For the reasons described above, the Company recorded a net income of
approximately $1,690,000 for the year ended December 31, 1998 compared to a net
loss of approximately $3,867,000 for the year ended December 31, 1997,
representing a 144% increase.
Years Ended December 31, 1997 and 1996
Total revenue for the year ended December 31, 1997 was approximately
$9,849,000 compared to approximately $1,640,000 for the year ended December 31,
1996, representing a 501% increase. The increase in total revenue was primarily
due to increases in sales and sale of marketing rights.
The Company had sales of approximately $1,895,000 for the year ended
December 31, 1997 compared to approximately $636,000 for the year ended December
31, 1996 representing a 198% increase. The increase was primarily due to the
increased sales of the ATRISORB(R) GTR Barrier in the United States as a result
of the Block Agreement and a new product released in the fourth quarter of 1997
and marketed by Heska.
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22
Contract revenue was approximately $854,000 for the year ended December 31,
1997 compared to approximately $1,004,000 for the year ended December 31, 1996,
representing a 15% decrease. Contract revenue represents revenue the Company
received from grants and from unaffiliated third parties for performing contract
research and development activities utilizing the ATRIGEL(R) system. The
decrease was primarily due to the completion of several research contracts
during 1996.
Sale of marketing rights represents milestone revenue the Company received
pursuant to the Block Agreement during the year ended December 31, 1997. The
Company earned $7,100,000 in milestone revenue for the year ended December 31,
1997. There was no revenue from the sale of marketing rights in 1996. The
Company expects to receive additional revenue in the future upon the achievement
of other milestones under the Block Agreement.
Cost of goods sold was approximately $1,533,000 for the year ended December
31, 1997 compared to approximately $364,000 for the year ended December 31,
1996, representing a 321% increase. The increase was primarily due to the
increased sales of the ATRISORB(R) GTR Barrier in the United States as a result
of the Block Agreement and sales of a new product released in the fourth quarter
of 1997 and marketed by Heska.
Research and development expenses, which included activities for the
ATRIDOX(R) product, the ATRISORB(R) GTR Barrier product and other research
activities, for the year ended December 31, 1997 were approximately $11,545,000
compared to approximately $10,092,000 for the year ended December 31, 1996,
representing a 14% increase. The increase was primarily a result of additional
expenditures in new areas of research using the Company's existing technology.
Administrative and marketing expenses were approximately $2,027,000 for the
year ended December 31, 1997 compared to $3,872,000 for the year ended December
31, 1996, representing a 48% decrease. The primary reason for this decrease was
the termination of the Company's sales and marketing expenses related to the
ATRISORB(R) GTR Barrier, since Block marketed the product.
Investment income for the year ended December 31, 1997 was approximately
$1,726,000 compared to approximately $1,204,000 for the year ended December 31,
1996, representing a 43% increase. Investment income increased due to additions
in principal investments as a result of the proceeds from the Company's Note
offering completed in the fourth quarter of 1997 and the $7,100,000 payment
received under the Block Agreement. The majority of the funds were invested in
U.S. government bond funds, long-term U.S. government and government agency
investments. The remaining cash and cash equivalents were invested in interest
bearing accounts and commercial paper to fund the Company's short-term
operations.
Interest expense for the year ended December 31, 1997 was approximately
$307,000 compared to zero for the year ended December 31, 1996. The increase was
due to the interest expense on the $50,000,000 Notes issued in the fourth
quarter of 1997.
During 1996, the Company recorded a one-time non-cash charge of
approximately $585,000 for compensation expense associated with the cancellation
of certain employee incentive stock options with a five year term and the
issuance of new non-qualified stock options that extended the term to ten
years.
The Company recorded a net loss of approximately $3,867,000 for the year
ended December 31, 1997 compared to a net loss of approximately $11,432,000 for
the year ended December 31, 1996, representing a 66% decrease. The reduction in
net loss was primarily the result of the receipt of the milestone payment of
$7,100,000 from Block.
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23
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and cash equivalents of
approximately $18,557,000, marketable securities of approximately $37,103,000,
accounts receivable of approximately $5,937,000, inventory of approximately
$2,564,000, and other current assets of approximately $1,518,000, for total
current assets of approximately $65,678,000. Current liabilities totaled
approximately $2,557,000, which resulted in working capital of approximately
$63,121,000.
In September 1998, the Company renewed a $1,000,000 line of credit with a
bank. Borrowings under the line bear interest at the prime rate. As of December
31, 1998, there were no borrowings outstanding under this credit agreement.
In November 1997, the Company issued $50,000,000 in principal amount of the
Notes. Interest is payable semi-annually and the Notes mature on December 1,
2004. The Notes are convertible, at the option of the holder, into Common Stock
at a conversion price of $19.00 a share, subject to adjustment in certain
events. The Notes are redeemable, in whole or in part, at the Company's option
at any time on or after December 5, 2000. In December 1998, the Company
purchased $1,500,000 in principal amount of the Notes on the open market for
approximately $1,193,000 and subsequently cancelled the repurchased Notes.
Through the purchase of these Notes, the Company reduced deferred finance
charges by approximately $51,000 on a pro-rated basis and recognized an
extraordinary gain of approximately $257,000. As of December 31, 1998,
$48,500,000 of the Notes remain outstanding.
During the year ended December 31, 1998, net cash used in operating
activities was approximately $1,176,000. This was primarily a result of the net
income for the period of approximately $1,690,000 which is offset by certain
non-cash expenses, and changes in other operating assets and liabilities as set
forth in the statements of cash flows. Net cash provided by investing activities
was approximately $7,157,000 during the year ended December 31, 1998, primarily
as a result of the net proceeds received from the maturity and sale of various
marketable securities during the period. Significant uses of cash for investing
activities during the year ended December 31, 1998 included the acquisition of
property, plant and equipment and the acquisition of ViroTex. Net cash used in
financing activities was approximately $2,610,000 during the year ended December
31, 1998, primarily as a result of the retirement of $1,500,000 in principal
amount of Notes and the repurchase of the Common Stock.
FUTURE CAPITAL REQUIREMENTS
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
and clearance applications, the development of the Company's commercial
manufacturing facilities, including the expansion or possible construction of an
administrative and laboratory facility on land adjacent to its manufacturing
facility, the ability of the Company to obtain additional licensing
arrangements, and the demand for the Company's products. The Company expended
approximately $1,004,000 for property, plant and equipment, approximately
$213,000 for patent development, and approximately $3,976,000 for the
acquisition of ViroTex in the year ended December 31, 1998.
The Company expects to continue to incur substantial expenditures for
research and development, testing, regulatory compliance and to hire additional
management, scientific, manufacturing and administrative personnel. The Company
will also continue to expend a significant amount of funds in its ongoing
clinical studies. Depending on the results of the Company's research and
development activities, the Company may determine to accelerate or expand its
efforts in one or more of its proposed areas and may, therefore, require
additional funds earlier than previously anticipated. Management believes that
the proceeds of the Note Offering, together with existing cash resources, will
be sufficient to fund its operations through 1999. However, there can be no
assurance that underlying assumed levels of revenue and expense will prove
accurate.
22
24
The Company believes that it is advisable to augment its cash in order to
fund all of its activities, including potential product acquisitions. Therefore,
the Company will consider raising cash whenever market conditions are favorable.
Such capital may be raised through additional public or private financing, as
well as collaborative relationships, borrowings and other available sources. In
addition, in the course of its business, the Company evaluates products and
technologies held by third parties which, if acquired, could result in the
development of product candidates by the Company or which complement
technologies currently being developed by the Company. The Company expects, from
time to time, to be involved in discussions with other entities concerning the
Company's potential acquisition of rights to additional pharmaceutical products.
In the event that the Company acquires such products or third party
technologies, the Company may find it necessary or advisable to obtain
additional funding.
IMPACT OF INFLATION
Although it is difficult to predict the impact of inflation on costs and
revenues of the Company in connection with the Company's products, the Company
does not anticipate that inflation will materially impact its costs of operation
or the profitability of its products when marketed.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. 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 is currently engaged in a two-phase process to
evaluate its internal status with respect to the Year 2000 issue. In the first
phase, which the Company expects to complete in the second quarter of fiscal
1999, the Company is conducting an evaluation 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 completed a significant portion of this phase to
date, and systems that have been evaluated 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 operations of the Company.
Phase two of the process, which is expected to be completed during the
fourth quarter of fiscal 1999, will involve taking any needed corrective action
to bring systems into compliance and to develop a contingency plan in the event
any non-compliant critical systems remain by January 1, 2000. As part of this
phase, the Company will attempt to quantify the impact, if any, of the failure
to complete any necessary corrective action. 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 have
not been material. Future costs will remain difficult to estimate until the
completion of phase one; however, the Company does not currently anticipate that
such costs will be material.
Concurrently with the two-phase analysis of its internal systems, the
Company has begun to survey third-party entities with which the Company
transacts business, including critical vendors and financial institutions, for
Year 2000 compliance. The Company expects to complete this survey in the second
quarter of fiscal 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.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (the "Statement"). The Statement, which will be
effective for the year 2000, requires derivative instruments to be recorded in
the balance sheet at their fair value with changes in fair value being
recognized in earnings unless specific hedging accounting criteria are met. The
Company does not utilize hedges or derivative instruments and will not be
impacted by this Statement.
RISK FACTORS
In addition to the other information contained in this Report, the Company
cautions stockholders and potential investors that the following important
factors, among other, in some cases have affected, and in the future could
affect, the Company's actual results of and could cause the Company's actual
results to differ materially from those expressed in any forward-looking
statements made by, on, or on behalf of, the 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:
o Delay, difficulty or failure in obtaining regulatory approval or
clearance to market additional products; including delays or
difficulties in development because of insufficient proof of safety or
efficacy.
o Substantial manufacturing and marketing expenses to be incurred in the
commercial launch of the ATRIDOX(R) product and commercializing future
products.
o Failure of corporate partners to develop or commercialize successfully
the Company's products or to retain and expand markets served by the
commercial collaborations; conflicts of interest, priorities, and
commercial strategies that may arise between the Company and such
corporate partners.
o The Company's limited experience in the sale and marketing of its
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 product in
North America. Failure to internally develop marketing channels for the
ATRISORB(R) GTR Barrier products, the ATRISORB(R)-DOXY product and the
ATRIDOX(R) product in Europe.
o The ability to obtain, maintain and prosecute intellectual property
rights, and the cost of acquiring in-process technology and other
intellectual property rights, either by license, collaboration or
purchase of another entity.
o Limited experience in manufacturing products on a commercial scale;
failure to manufacture present and future products in compliance with
applicable regulations and at an acceptable cost.
o Cancellation or termination of material collaborative agreements
(including the Block Agreement) and the resulting loss of research or
other funding, or marketing, sales and distribution capabilities.
o Access to the pharmaceutical compounds necessary to successfully
commercialize the ATRIGEL(R) system or other delivery systems currently
in development.
24
26
o Competitive or market factors that may cause use of the Company's
products to be limited or otherwise fail to achieve broad acceptance.
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.
ITEM 7A. 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 the nature of the Company's investments 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 are
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 December
31, 1998. The fair values that result from these computations are compared with
the fair values of these financial instruments at December 31, 1998. The
differences in this comparison are the hypothetical gains or losses associated
with each type of risk. The results of the sensitivity analysis at December 31,
1998 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
25
27
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 $4.9 million at December 31, 1998, 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 $36,375,000 at December 31, 1998
and is lower than the carrying value by $12,125,000. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company required by Regulation S-X are
attached to this Report. Reference is made to Item 14 below for an index to the
financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained in the Company's definitive proxy statement for
the Company's Annual Meeting of Shareholders scheduled to be held on April 25,
1999 regarding directors and officers of the Company and compliance with Section
16(a) of the Exchange Act is incorporated herein by reference in response to
this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the Company's definitive proxy statement for
the Company's Annual Meeting of Shareholders scheduled to be held on April 25,
1999 regarding executive compensation is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Shareholders scheduled to be held on April 25, 1999
regarding security ownership of certain beneficial owners and management is
hereby incorporated herein by reference in response to this item.
26
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Shareholders scheduled to be held on April 25, 1999
regarding certain relationships and related transactions is hereby incorporated
herein by reference in response to this item.
27
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents of the Company are filed as part of
this Report:
1. Financial Statements
Independent Auditors' Report
Balance Sheets - December 31, 1998 and 1997
Statements of Operations - Years Ended December 31,
1998, 1997 and 1996
Statements of Changes in Shareholders' Equity - Years
Ended December 31, 1998, 1997 and 1996
Statements of Cash Flows - Years Ended December 31,
1998, 1997 and 1996
Notes to the Financial Statements
2. Financial Statement Schedules
Schedules for which provision is made in the
applicable regulations of the Securities and Exchange
Commission have been omitted because they are not required
under the related instructions or the information related is
contained elsewhere in the financial statements.
3. Exhibits
Exhibit No. Description
2.1 Agreement and Plan of Reorganization dated November
24, 1998 by and among Atrix Laboratories, Inc.,
Atrix Acquisition Corporation and ViroTex
Corporation(6)
2.2 Certificate of Merger of Atrix Acquisition
Corporation into ViroTex Corporation dated November
24, 1998(6)
3.1 Amended and Restated Certificate of Incorporation*
3.2 Seventh Amended and Restated Bylaws(1)
4.1 Form of Common Stock Certificate(2)
4.2 Indenture, dated November 15, 1997, by and among
the Registrant and State Street Bank and Trust
company of California, N.A., as trustee
thereunder(4)
4.3 Form of Note (included in Indenture, see Exhibit
4.2)
4.4 Rights Agreement (including form of Right
Certificate, as Exhibit A, and form of Summary of
Rights, as Exhibit B)(5)
4.5 Warrant to purchase 6,750 shares of Atrix Common
Stock issued to Gulfstar Investments, Limited*
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30
10.1 Employment Agreement between Registrant and John E.
Urheim dated June 4, 1993(2)
10.2 Lease Agreement dated May 11, 1991 between the
Registrant and GB Ventures(2)
10.3 Agreement dated December 16, 1996 between the
Registrant and Block Drug Corporation ("Block
Agreement")(3)**
10.3A First Amendment to Block Agreement dated June 10,
1997*,**
10.3B Second Amendment to Block Agreement dated July 31,
1997*,**
10.3C Third Amendment to Block Agreement dated February
4, 1998*,**
10.3D Fourth Amendment to Block Agreement dated January
12, 1999*,**
10.3E Fifth Amendment to Block Agreement dated January
27, 1999*,**
10.4 Registration Rights Agreement, dated as of November
15, 1997, by and among Registrant and NationsBanc
Montgomery Securities, Inc. and SBC Warburg Dillon
Read, Inc.(4)
10.5 Amended and Restated Performance Stock Option Plan,
as amended.*
10.6 Non-Qualified Stock Option Plan, as amended.*
10.7 Employment Agreement between Registrant and Dr. J.
Steven Garrett dated April 17, 1995*
10.8 Employment Agreement between Registrant and Rees M.
Orland dated January 1, 1996*
10.9 Employment Agreement between Registrant and Dr.
David W. Osborne dated November 24, 1998*
10.10 Employment Agreement between Registrant and Dr.
Richard L. Jackson dated November 1, 1998*
21 Subsidiaries of the Registrant*
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
- -------------------
* Filed herewith.
** Confidential treatment requested.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, file number 333-43191.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993 as filed with the Securities and
Exchange Commission.
(3) Incorporated by reference to Registrant's Current Report on Form 8-K dated
December 16, 1996, as amended on May 20, 1998, as filed with the Securities
and Exchange Commission.
(4) Incorporated by reference to Registrant's Current Report on Form 8-K dated
November 6, 1997, as filed with the Securities and Exchange Commission.
(5) Incorporated by reference to Registrant's Registration Statement on Form
8-A, file number 000-18231.
(6) Incorporated by reference to Registrant's Current Report on Form 8-K dated
November 24, 1998, as filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K:
1. A current report on Form 8-K, dated November 24, 1998, was
filed with the Securities and Exchange Commission under
Item 2 regarding the acquisition of ViroTex.
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31
FINANCIAL STATEMENT INDEX
Page
----
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Balance Sheets - December 31, 1998 and 1997 F-3
Statements of Operations - Years Ended December 31, 1998,
1997 and 1996 F-4
Statements of Changes in Shareholders' Equity - Years Ended
December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows - Years Ended December 31, 1998,
1997 and 1996 F-6
Notes to the financial statements F-7- F-19
F-1
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Atrix Laboratories, Inc.
Fort Collins, Colorado
We have audited the accompanying balance sheets of Atrix Laboratories,
Inc. (the "Company") as of December 31, 1998 and 1997, and the related
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 3, 1999
F-2
33
ATRIX LABORATORIES, INC.
BALANCE SHEETS
ASSETS
December 31, December 31,
1998 1997
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 18,556,641 $ 15,185,841
Marketable securities, at fair market value 37,102,867 50,233,553
Accounts receivable, net of allowance for doubtful accounts
of $49,165 and $111,479 5,937,446 1,553,427
Interest receivable 664,374 340,346
Inventories 2,563,536 1,309,519
Prepaid expenses and deposits 853,266 196,574
-------------- -----------------
Total current assets 65,678,130 68,819,260
-------------- -----------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 9,504,581 8,332,671
Leasehold improvements 605,107 605,107
-------------- -----------------
Total property plant and equipment 10,109,688 8,937,778
Accumulated depreciation and amortization (2,978,121) (2,381,908)
-------------- -----------------
Property, plant and equipment, net 7,131,567 6,555,870
-------------- -----------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $522,314 and $96,355 5,049,493 1,024,953
Deferred finance costs, net of accumulated amortization of $252,131 and $22,814 1,620,412 1,893,576
-------------- -----------------
Total other assets 6,669,905 2,918,529
-------------- -----------------
TOTAL ASSETS $ 79,479,602 $ 78,293,659
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,650,490 $ 1,052,362
Interest payable 279,039 287,671
Accrued salaries and payroll taxes 263,204 155,200
Other accrued liabilities 210,869 95,508
Deferred revenue 153,602 --
-------------- -----------------
Total current liabilities 2,557,204 1,590,741
-------------- -----------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 48,500,000 50,000,000
-------------- -----------------
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; 11,360,672 and 11,177,261 shares
issued; 11,203,672 and 11,177,261 shares outstanding 11,361 11,177
Additional paid-in capital 74,822,942 73,224,442
Treasury stock, 157,000 shares, at cost (1,650,564) --
Accumulated other comprehensive loss (96,553) (177,867)
Accumulated deficit (44,664,788) (46,354,834)
-------------- -----------------
Total shareholders' equity 28,422,398 26,702,918
-------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 79,479,602 $ 78,293,659
============== =================
See notes to the financial statements
F-3
34
ATRIX LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------- ------------- -------------
REVENUE:
Sales $ 3,451,148 $ 1,895,179 $ 635,517
Contract revenue 621,771 854,081 1,004,201
Sale of marketing rights 17,000,000 7,100,000 --
------------- ------------- -------------
Total revenue 21,072,919 9,849,260 1,639,718
------------- ------------- -------------
OPERATING EXPENSES:
Cost of goods sold 2,249,776 1,533,441 363,517
Research and development 12,189,212 11,544,593 10,091,736
Purchased in-process research and development 3,050,000 -- --
Administrative and marketing 2,506,879 2,027,034 3,872,425
------------- ------------- -------------
Total operating expenses 19,995,867 15,105,068 14,327,678
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 1,077,052 (5,255,808) (12,687,960)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Investment income 3,937,780 1,725,838 1,204,352
Interest expense (3,574,906) (306,950) --
Other 41,625 (29,797) 51,455
------------- ------------- -------------
Total other income 404,499 1,389,091 1,255,807
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 1,481,551 (3,866,717) (11,432,153)
Income tax - current expense (48,183) -- --
------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,433,368 (3,866,717) (11,432,153)
Extraordinary gain on extinguishment of debt 256,678 -- --
------------- ------------- -------------
ET INCOME (LOSS) $ 1,690,046 $(3,866,717) $(11,432,153)
============= ============= ==============
Basic and diluted earnings per common share:
Income (loss) before extraordinary item $ .13 $ (.35) $ (1.13)
Extraordinary item .02 -- --
------------- ------------- -------------
Net income (loss) $ .15 $ (.35) $ (1.13)
============= ============= =============
Basic and diluted weighted average common shares
outstanding 11,269,981 11,133,669 10,146,703
------------- ------------- -------------
See notes to the financial statements.
F-4
35
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional Accumulated Accumulated Treasury Total
Paid-in Deficit Other Stock Shareholders'
Capital Comprehensive Equity
Loss
Shares Amount
----------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1995 8,433,296 $ 8,433 $43,889,473 $(31,055,964) $(35,176) $ --- $ 12,806,766
Comprehensive loss:
Net loss --- --- --- (11,432,153) --- --- (11,432,153)
Other comprehensive loss
- Unrealized loss on --- --- --- --- (117,465) --- (117,465)
investments ________________
Total comprehensive loss (11,549,618)
Exercise of stock options 92,828 93 597,824 --- --- --- 597,917
Issuance for cash 2,587,500 2,588 27,841,389 --- --- --- 27,843,977
Compensation-stock options --- --- 584,588 --- --- --- 584,588
----------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1996 11,113,624 11,114 72,913,274 (42,488,117) (152,641) --- 30,283,630
Comprehensive loss:
Net loss --- --- --- (3,866,717) --- --- (3,866,717)
Other comprehensive loss
- Unrealized loss on --- --- --- --- (25,226) --- (25,226)
investments ________________
Total comprehensive loss (3,891,943)
Exercise of stock options 63,637 63 311,168 --- --- --- 311,231
----------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1997 11,177,261 11,177 73,224,442 (46,354,834) (177,867) --- 26,702,918
Comprehensive income:
Net income --- --- --- 1,690,046 --- --- 1,690,046
Other comprehensive Income
- Unrealized gain on --- --- --- --- 81,314 --- 81,314
investments ________________
Total comprehensive income 1,771,360
Exercise of stock options 145,212 146 228,686 --- --- --- 228,832
Issuance for employee stock
purchase plan 339 --- 4,557 --- --- --- 4,557
Issuance for acquisition:
Common stock 37,860 38 389,920 --- --- --- 389,958
Stock options --- --- 921,370 --- --- --- 921,370
Warrants --- --- 30,555 --- --- --- 30,555
Compensation-stock options --- --- 23,412 --- --- --- 23,412
Purchase of treasury stock (157,000) --- --- --- --- (1,650,564) (1,650,564)
----------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1998 11,203,672 $11,361 $74,822,942 $(44,664,788) $(96,553) $(1,650,564) $28,422,398
====================================================================================================
See notes to the financial statements.
F-5
36
ATRIX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,690,046 $ (3,866,717) $ (11,432,153)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation 927,619 765,735 554,595
Amortization 390,252 58,464 56,623
Loss (gain) on sale of property, plant and equipment 45,031 76,889 (3,017)
Gain on sale of marketable securities (28,186) -- (36,419)
Write-off of obsolete patents 32,226 -- 29,579
Purchased in-process research and development 3,050,000 -- --
Compensation - stock options 23,412 -- 584,588
Extraordinary gain on extinguishment of debt (256,678) -- --
Net changes in operating assets and liabilities, net of
effects of ViroTex acquisition:
Restricted cash equivalents -- 7,000,000 (7,000,000)
Accounts receivable (4,334,019) (872,137) (490,625)
Interest receivable (324,028) (186,218) (41,825)
Inventories (1,254,017) (1,006,014) (101,241)
Prepaid expenses and deposits (649,997) 104,747 271,430
Accounts payable - trade (466,755) 119,215 (929,703)
Interest payable (8,632) 287,671 --
Accrued salaries and payroll taxes (13,528) 66,332 16,669
Other accrued liabilities (152,428) (60,149) 3,549
Deferred revenue 153,602 (7,002,192) 7,002,192
----------------- ----------------- -----------------
Net cash used in operating activities (1,176,080) (4,514,374) (11,515,758)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,004,291) (2,623,291) (4,293,064)
Acquisition of leasehold improvements -- (39,499) (59,418)
Investment in patents (213,189) (203,854) (220,677)
Proceeds from sale of property, plant and equipment 2,725 30,855 253,835
Proceeds from sale of marketable securities 20,130,000 2,025,000 1,000,000
Proceeds from maturity of marketable securities 48,043,018 -- 4,070,501
Investment in marketable securities (54,968,515) (46,252,309) (234,328)
Acquisition of ViroTex - net of cash acquired (4,833,192) -- --
----------------- ----------------- -----------------
Net cash provided by (used in) investing
activities 7,156,556 (47,063,098) 516,849
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 233,388 311,231 28,441,894
Proceeds from issuance of convertible subordinated
notes -- 50,000,000 --
Purchased convertible long term debt (1,192,500) -- --
Payment of finance costs -- (1,916,390) --
Acquisition of treasury stock (1,650,564) -- --
----------------- ----------------- -----------------
Net cash provided by (used in) financing
activities (2,609,676) 48,394,841 28,441,894
----------------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,370,800 (3,182,631) 17,442,985
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,185,841 18,368,472 925,487
----------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,556,641 $15,185,841 $18,368,472
================= ================= =================
Supplemental cash flow information:
- Cash paid for interest: $ 3,569,421 $ 19,279 $ 2,502
================= ================= =================
Non cash activities - In 1998, the Company issued common stock, warrants, and
stock options valued at $1,341,883 in connection with the acquisition of
ViroTex.
See notes to the financial statements.
F-6
37
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Atrix Laboratories, Inc. (the "Company") was incorporated in 1986. The
Company is engaged in research, development and commercialization of a broad
range of dental, medical and veterinary products based on its proprietary
sustained release biodegradable polymer drug delivery system, trade-named
ATRIGEL(R). The Company commenced sales of its first product, the ATRISORB(R)
GTR Barrier in both the United States and Europe during 1996. In 1997, the
Company commenced sales of a product to treat periodontal disease in companion
animals. In 1998, the Company launched the ATRIDOX(R) product and the
ATRISORB(R) FreeFlow GTR Barrier product. The majority of Atrix's other products
are in either the research, development, or clinical stage. The Company acquired
ViroTex Corporation ("ViroTex") in November 1998 (See Note 7). ViroTex is
engaged in the development of over-the-counter and prescription products based
on its proprietary polymer and solvent based drug delivery systems.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with an original maturity
of three months or less.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale and carried at
fair value with the unrealized holding gain or loss included in shareholders'
equity. Premiums and discounts associated with bonds are amortized using the
effective interest rate method.
F-7
38
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market. The components of inventories are as follows as of
December 31:
1998 1997
---- ----
Raw Materials $1,659,097 $ 563,503
Work In Progress 393,068 500,198
Finished Goods 511,371 245,818
---------- ----------
TOTAL $2,563,536 $1,309,519
========== ==========
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 term of the
related lease.
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 $203,377, $198,856 and $93,072 for the years ended
December 31, 1998, 1997 and 1996 respectively.
INTANGIBLE ASSETS
Intangible assets consist of patents, purchased technology, purchased
royalty rights, and goodwill. Patents are stated at the legal cost incurred to
obtain the patents. Upon approval, patent costs are amortized, using the
straight-line method, over their estimated useful life. The values assigned to
the purchased technology, purchased royalty rights, and goodwill arising from
the ViroTex acquisition are amortized using the straight-line method over the
period of expected benefit of four to five years.
VALUATION OF LONG-LIVED ASSETS
The Company reviews long-lived assets, including intangible assets, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and establishes guidelines
for determining fair value based on future net cash flows for the use of the
asset and for the measurement of the impairment loss. Any impairment loss is
recorded in the period in which the recognition criteria are first applied and
met.
DEFERRED FINANCE COSTS
Costs associated with the issuance of the 7% convertible subordinated notes
are deferred and are being amortized on a straight-line basis over the
seven-year term of the notes.
F-8
39
REVENUE RECOGNITION
The Company recognizes revenue on sales at the time of shipment. Royalty
revenue is recognized at the time of shipment by licensee and is reported with
sales revenue. Revenue is recognized on research contracts as research work is
performed and costs are incurred. Deferred revenue is recorded with respect to
payments received that relate to research activities to be performed in
subsequent periods.
RESEARCH AND DEVELOPMENT
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share excludes dilution and is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding during the years presented. Diluted net income (loss) per common
share reflects the potential dilution of securities that could share in the
earnings. For the years presented, the effect of dilutive stock options is not
significant and the effect of the assumed conversion of the convertible
subordinated notes would be antidilutive. Therefore, diluted net income (loss)
per share is not materially different from basic net income (loss) per common
share.
OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." (SFAS 130) which
establishes new rules for the reporting and display of comprehensive income and
its components. The adoption of SFAS 130 had no impact on the Company's net
income or shareholders' equity. SFAS 130 requires unrealized gains and losses on
investments, which prior to adoption were reported separately in shareholder's
equity, to be included in accumulated other comprehensive income. Prior year
amounts have been reclassified to conform to the requirements of SFAS 130.
STOCK OPTION PLANS
The Company accounts for stock-based compensation to employees and directors
using the intrinsic value method in accordance with Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
accounts for stock-based compensation to non-employees using a fair value based
method in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation."
F-9
40
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement basis and the income tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future. Such deferred income tax
liability computations are based on enacted tax laws and rates applicable to the
years in which the differences are expected to affect taxable income. A
valuation allowance is established when necessary to reduce deferred income tax
assets to the amounts expected to be realized.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current presentation.
2. MARKETABLE SECURITIES
As of December 31, 1998 marketable securities consist of the following:
NUMBER OF
SHARES/
PRINCIPAL ESTIMATED
AMOUNT COST FAIR VALUE
----------- ----------- -----------
U.S. Government and Agency Bond Funds
Thornburg Fund 43,108 $ 543,888 $ 539,283
Pimco Fund 400,009 4,375,982 4,216,096
----------- ----------- -----------
Total 443,117 4,919,870 4,755,379
U.S. Government and Agency Bonds 40,519,885 32,279,550 32,347,488
=========== =========== ===========
Total 40,963,002 $37,199,420 $37,102,867
=========== =========== ===========
As of December 31, 1997 marketable securities consist of the following:
NUMBER OF
SHARES/
PRINCIPAL ESTIMATED
AMOUNT COST FAIR VALUE
----------- ----------- -----------
U.S. Government and Agency Bond Funds:
Thornburg Fund 40,815 $ 515,338 $ 504,059
Pimco Fund 364,087 3,992,860 3,859,326
----------- ----------- -----------
Total 404,902 4,508,198 4,363,385
U.S. Government and Agency Bonds 42,000,000 42,014,235 41,981,180
Commercial Paper-6 month maturity 3,888,988 3,888,988 4,000,000
=========== =========== ===========
Total 46,404,902 $50,411,421 $50,233,553
=========== =========== ===========
As of December 31, 1998 gross unrealized gains and losses pertaining to
marketable securities are $96,069 and $192,622, respectively. As of December 31,
1997 gross unrealized gains and losses pertaining to marketable securities are
$9,997 and $187,864, respectively.
F-10
41
3. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
1998 1997
------------------ -----------------
Patents $1,596,002 $1,121,308
Purchased Technology 2,800,000 --
Purchased Royalty Rights 600,000 --
Goodwill 575,805 --
------------------ -----------------
Sub-total 5,571,807 1,121,308
------------------ -----------------
Less: Accumulated Amortization (522,314) (96,355)
------------------ -----------------
Total $5,049,493 $1,024,953
================== =================
4. LINE OF CREDIT
In September 1998, the Company renewed a revolving line of credit with a
bank. Under the terms of the line of credit, the Company may borrow up to
$1,000,000. Borrowings under the line bear interest at the prime rate and are
subject to financial covenants requiring the Company to maintain certain levels
of net worth and liquidity. As of December 31, 1998, the Company had no
outstanding balance under this line.
5. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1997, the company issued $50,000,000 of convertible subordinated
notes. 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 December 1998, the Company repurchased $1,500,000, or 3%, of its
outstanding 7% convertible subordinated notes for $1,192,500. As a result, the
Company recognized an extraordinary gain of approximately $257,000, net of
deferred finance charges of $51,000. As of December 31, 1998, $48,500,000 of
these notes are outstanding.
(See notes 13 and 15)
6. BLOCK DRUG CORPORATION AGREEMENT
On December 17, 1996, the Company entered into an agreement with Block Drug
Corporation ("Block"). Under the terms of the agreement, Block acquired the
North American marketing rights to the ATRISORB(R) GTR Barrier and
ATRISORB(R)-DOXY product, and the rights to market the ATRIDOX(R) product in the
United States, with an option to acquire the rights to market the ATRIDOX(R)
product in Canada and certain European countries. On September 12, 1997, Block
exercised its option to market the ATRIDOX(R) product in Canada, but let its
option lapse with respect to Europe.
F-11
42
Under the Block Agreement, Block is responsible for sales and marketing for
the products and will advise, consult and may financially support various
aspects of the Company's dental research and development program. The Company
also has the right to co-market the products if certain annual sales levels are
not met. The Block Agreement provides for both milestone and royalty payments to
the Company. The Block Agreement expires on a product-by-product and a
country-by-country basis upon the expiration of the last applicable patent or
loss of patent protection for a product in a given country. The first patent
will expire in 2012. In addition, Block may terminate the Block agreement at any
time without cause upon 12 months written notice to the Company, if the Company
commits a willful and material breach of the Block agreement, or if the Company
ceases to manufacture or supply the product to Block pursuant to the Block
Agreement. The Company may terminate the Block Agreement if Block fails to make
any required payment, if Block commits a willful and material breach of the
Block Agreement, if Block ceases to offer the product for distribution, or if
Block markets, distributes or sells a competitive product.
In 1997, the Company recognized revenue of $7,000,000 for the sale of
marketing rights to the ATRISORB(R) GTR Barrier. The Company received an
additional $100,000 payment from Block in September 1997 when Block exercised
its option to acquire rights to market ATRIDOX(R) and ATRISORB(R) GTR Barrier
products in Canada.
In 1998, the Company received milestone payments of $12,000,000 pursuant to
Block Agreements as a result of FDA approval of the Company's new drug
application for ATRIDOX(R). The Company also earned an additional milestone of
$5,000,000 as a result of Block's first commercial sale of the ATRIDOX(R)
product. Total milestone payments earned in 1998 were $17,000,000.
7. ACQUISITION OF VIROTEX
In November 1998, the Company acquired the common stock of ViroTex. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets and liabilities of ViroTex have been recorded at their
fair value at the date of acquisition. The results of operations of ViroTex have
been included in the financial statements of the Company since the date of
acquisition. Total consideration paid was $7,693,749 as follows: cash of
$6,201,556, 37,860 shares of common stock valued at $389,958, stock options to
purchase 113,229 shares of common stock valued at $921,370, a warrant to
purchase 6,750 shares of common stock valued at $30,556, and transaction
expenses of $150,309. Additional consideration of up to $3,000,000 is payable,
in shares of common stock or cash, over the next three years upon the
satisfaction of certain defined earn-out events related to the performance of
certain ViroTex products.
F-12
43
The total purchase price of $7,693,749 was allocated to the fair value of
the assets, based primarily on an independent third party valuation, as follows:
Net Tangible Assets $ 667,944
----------
Intangible Assets:
Purchased in process research and development 3,050,000
Purchased Technology 2,800,000
Purchased Royalty Rights 600,000
Goodwill 575,805
----------
Total $7,025,805
----------
Net Assets Purchased $7,693,749
==========
The Company expensed $3,050,000 of the purchase price, which was allocated
to in-process research and development projects, as of the date of acquisition.
The projects were valued using the discounted cash flow method in an independent
third party valuation.
The following unaudited pro forma results of operations for the year ended
December 31, 1998, 1997 and 1996 assumes the purchase of ViroTex had occurred as
of January 1, 1996:
1996 1997 1998
------------ ------------ ------------
Total revenues $ 3,763,912 $ 16,509,489 $ 25,260,962
------------ ------------ ------------
Net income (loss) $(13,401,655) $ (2,736,752) $ (142,921)
------------ ------------ ------------
Basic and diluted net income
(loss) per common share $ (1.32) $ (.25) $ (0.01)
------------ ------------ ------------
The pro forma results of operations include adjustments to give effect to
amortization of goodwill and other intangible assets, the write-off of purchased
in-process research and development and certain other adjustments. The unaudited
pro forma financial information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made as of January 1,
1996, or the future results of combined operations.
8. STOCK OPTION PLANS
As of December 31, 1998, the Company has two stock-based compensation plans,
which are discussed below.
PERFORMANCE STOCK OPTION PLAN
The 1987 Performance Stock Option Plan, as amended and restated in 1992 (The
"Plan") permits the granting of both incentive stock options, as defined under
Section 422 of the Internal Revenue Code, and non-qualified stock options to
employees, officers and directors. The exercise price of each option, which have
a maximum ten year life, is equal to the market price of the Company's common
stock on the date of grant.
The Company accounts for the Plan using the intrinsic value method in
accordance with APB No. 25 and has adopted the disclosure-only provisions of
SFAS No. 123. Accordingly, no compensation expense has been recognized for the
F-13
44
Plan. Had compensation cost for the Plan been determined based on the fair value
at the grant dates of awards under the Plan consistent with SFAS No. 123, the
Company's net income (loss) and basic and diluted income (loss) per common share
would have been reduced to the pro forma amounts indicated below:
1998 1997 1996
----------- ------------ ------------
Net income (loss) :
-- as reported $ 1,690,046 $ (3,866,717) $(11,432,153)
----------- ------------ ------------
-- pro forma $ 76,088 $ (5,067,819) $(12,188,993)
----------- ------------ ------------
Basic and diluted net income (loss) per
common share:
-- as reported $ .15 $ (.35) $ (1.13)
----------- ------------ ------------
-- pro forma $ .01 $ (.46) $ (1.20)
----------- ------------ ------------
The Company has reserved 1,500,000 of its authorized but unissued common
stock for stock options to be granted under the Plan. On April 27, 1997, the
stockholders of the Company approved an amendment to the Plan that increased the
maximum aggregate number of shares issuable upon the exercise of options granted
under the Plan from 1,500,000 shares to 2,500,000 shares. Under the terms of the
Plan, options are not exercisable for a period of one to three years from the
date of grant. The exercise price of all options is the closing bid price of the
stock on the date of grant. There are 492,881 shares which remain available
under the plan for future employee stock option grants.
The weighted average Black-Scholes fair value per option granted in 1998,
1997 and 1996 was $5.29, $4.58 and $2.33, respectively. The fair value of
options granted under the Plan was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996: no dividend yield, expected
volatility of 47.7% for 1998, 41.7% for 1997 and 37.8% for 1996, risk free
interest rate of 7.0%, and expected life of 5 years.
F-14
45
The following table summarizes information on stock option activity for the
Plan:
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------ -------------- ---------------
Options outstanding, December 31, 1995 760,255 $.50-- 20.75 $ 6.64
Options granted 602,574 .50-- 14.00 8.64
Options canceled or expired (408,580) 5.88-- 20.75 8.58
Options exercised (92,828) .50-- 9.88 6.44
------------ -------------- ---------------
Options outstanding, December 31, 1996 861,421 .50-- 14.00 7.14
Options granted 189,090 10.75-- 21.75 14.41
Options canceled or expired (6,977) 6.13-- 11.63 10.97
Options exercised (20,137) .50-- 11.75 7.16
------------ -------------- ---------------
Options outstanding, December 31, 1997 1,023,397 .50-- 21.75 8.45
Options granted 409,169 1.18-- 19.00 9.60
Options canceled or expired (12,190) .50-- 12.50 8.22
Options exercised (145,222) 10.50-- 20.00 1.58
------------ -------------- ---------------
Options outstanding, December 31, 1998 1,275,154 $.50-- 21.75 $9.60
------------ -------------- ---------------
Options outstanding are available for
exercise as follows:
Currently Exercisable 792,600 $ 7.81
1999 226,868 12.15
2000 158,297 13.21
2001 97,389 12.40
------------ ---------------
Total 1,275,154 $ 9.60
============ ===============
On November 18, 1996, the Company canceled certain incentive and
non-qualified stock options with a five-year term and issued new incentive and
non-qualified stock options which extended the original term to ten years. The
effect of this cancellation and reissuance was a $584,588 charge to compensation
expense during 1996.
The following table summarizes information about stock options outstanding
under the Plan as of December 31, 1998:
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, EXERCISE PRICE
EXERCISE PRICES 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998 EXERCISABLE
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
$ .50 - 1.57 31,820 1 year $1.35 31,820 $1.35
1.57 - 14.00 24,578 3 years 2.07 24,578 2.07
6.75 - 9.88 284,465 4 years 8.50 284,465 8.50
1.57 - 9.13 96,982 5 years 5.28 96,982 5.28
1.57 - 6.88 96,971 6 years 5.78 96,971 5.78
6.63 - 11.94 143,248 7 years 8.38 115,861 8.07
6.88 - 13.25 189,197 8 years 10.24 103,343 10.05
11.38 - 21.75 199,233 9 years 16.67 38,580 16.44
10.06 - 14.44 208,660 10 years 10.57 -- --
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
$ 0.50 - 21.75 1,275,154 7.69 years $9.60 792,600 $7.81
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
NON-QUALIFIED STOCK OPTION PLAN
The Company has reserved 150,000 of its authorized but unissued common stock
for stock options to be granted to outside consultants under its Non-qualified
Stock Option Plan (the "Non-qualified Plan"). In 1998, the Company amended the
Non-qualified Plan to increase 50,000 shares to provide for a total of 150,000
F-15
46
shares. The option price and exercisability of options granted under the
Non-qualified Plan are set by the Compensation Committee. The exercise price of
all options granted under the Non-qualified Plan currently outstanding is the
closing market price at the date of grant. There are 72,020 shares, which remain
available under the Non-qualified Plan for future stock option grants.
The weighted average Black-Scholes fair value per option granted in 1998,
1997 and 1996 was $7.80, $3.98 and $2.00, respectively. In 1998, compensation
expense for Non-qualified Plan grants was $23,412. The fair value of options
granted under the Non-qualified Plan was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used in 1998, 1997 and 1996: no dividend yield, expected volatility
of 47.7% for 1998, 41.7% for 1997 and 37.8% for 1996, risk free interest rate of
7.0%, and expected lives of 5 years.
The following table summarizes information on stock option activity for the
Non-qualified Plan.
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------------- --------------------- -------------------
Options outstanding, December 31, 1995 47,860 $ 3.75-- 6.63 $ 4.55
Options granted 9,120 6.63-- 9.50 7.78
Options canceled or expired -- -- --
------------------- --------------------- -------------------
Options outstanding, December 31, 1996 56,980 3.75-- 9.50 5.07
Options granted 18,000 .50-- 16.50 8.59
Options exercised (43,500) .50-- 6.88 3.84
------------------- --------------------- -------------------
Options outstanding, December 31, 1997 31,480 5.13-- 16.50 8.92
Options granted 3,000 15.38 15.38
Options exercised -- -- --
------------------- --------------------- -------------------
Options outstanding, December 31, 1998 34,480 $ 5.13-- 16.50 $ 8.67
------------------- --------------------- -------------------
Options outstanding are available for
exercise as follows:
Currently Exercisable 22,107 $ 7.53
1999 6,373 12.22
2000 5,000 13.18
2001 1,000 15.38
------------------- -------------------
Total 34,480 $ 8.67
------------------- -------------------
F-16
47
The following table summarizes information about stock options outstanding
under the Nonqualified Plan as of December 31, 1998:
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT EXERCISE
EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, PRICE
PRICES 1998 LIFE EXERCISE PRICE 1998 EXERCISABLE
- --------------------- -------------------- -------------------- ------------------- ----------------- ------------------
$5.13-- 6.63 10,360 6 years $ 5.62 10,360 $ 5.62
7.00 5,000 7 years 7.00 5,000 7.00
6.63-- 16.50 16,120 8 years 11.63 6,747 9.23
15.38 3,000 9 years 15.38 - -
- --------------------- -------------------- -------------------- ------------------- ----------------- ------------------
$5.13-- 16.50 34,480 7.34 years $ 8.67 22,107 $ 7.53
- --------------------- -------------------- -------------------- ------------------- ----------------- ------------------
9. INCOME TAXES
Net deferred tax assets at December 31, consist of:
1998 1997
----------------------- --------------------
Deferred tax assets:
Net operating loss carry forwards $15,129,836 $16,102,000
Research and development tax credit carryforwards 649,162 496,282
Amortization of intangibles 2,311,644 2,488,000
Purchased in-process research and development 1,131,330 --
Depreciation 164,874 140,000
Other items 229,831 269,000
----------------------- --------------------
Net deferred tax assets 19,616,677 19,495,282
----------------------- --------------------
Less valuation allowance 19,616,677 19,495,282
----------------------- --------------------
Total $ 0 $ 0
----------------------- --------------------
At December 31, 1998, the Company has approximately $42,170,473 of federal
income tax net operating loss carry forwards and $1,608,039 of research and
development credits, which expire through 2012. Included in the deferred tax
asset for net operating loss carryforwards are benefits from the exercise of
employee stock options of $1,656,063, which when subsequently recognized will be
allocated to additional paid in capital.
A reconciliation of the differences in income tax expense from income (loss)
before extraordinary item computed at the federal statutory rate and income tax
expense as recorded for the year ended December 31 are as follows:
1998 1997 1996
---------------- ------------------ ---------------
Income tax computed at federal statutory rate: $ 590,998 $(1,314,684) $(3,886,932)
State income taxes - net of federal benefit 57,362 (127,602) (377,261)
Permanent differences 8,457 10,685 65,212
Exercise of employee stock options (593,368) (324,545) (106,347)
Research and Development (151,977) (145,739) (63,622)
Other 15,316 (38,671) (53,855)
Change in valuation allowance 121,395 1,940,556 4,422,805
---------------- ------------------ ---------------
Income tax expense $ 48,183 $ -- $ --
================ ================== ===============
F-17
48
10. SEGMENT AND CUSTOMER INFORMATION
The Company operates in a single reportable segment and all revenues from
customers are from a similar group of periodontal products. Sales and milestone
revenues from one customer amounted to $19,028,000 and $8,213,000 for the years
ended December 31, 1998 and 1997, respectively. Contract revenues from three
customers amounted to $198,000, $235,000 and $270,000 for the year ended
December 31, 1996. Revenues from export sales to foreign customers amounted to
approximately $557,000, $100,000 and $124,000 for the years ended December 31,
1998, 1997 and 1996 respectively.
11. LEASE COMMITMENTS
As of December 31, 1998, minimum rental commitments under non-cancelable
operating leases of one year or more are as follows:
Year Ending
December 31,
------------------------
1999 $ 290,358
2000 261,872
2001 262,944
2002 270,830
2003 114,232
2004 --
---------------------
Total $ 1,200,236
=====================
Rent expense was $275,917, $212,982 and $205,583 for the years ended
December 31, 1998, 1997 and 1996, respectively.
12. BENEFIT PLANS
The Company has an employee savings plan (the "Savings Plan") which
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. This Savings Plan allows eligible employees to contribute from 1%
to 17% of their income to this Savings Plan. The Company matches 50% of the
first 6% of the employee's contributions which are immediately vested. The
Company's matching contributions to the Savings Plan were approximately $91,889,
$64,770 and $48,461 for 1998, 1997 and 1996, respectively.
On April 27, 1997, the stockholders of the Company approved the Atrix
Laboratories, Inc. 1997 Employee Stock Purchase Plan (the "ESPP"). The ESPP
provides eligible employees with the opportunity to purchase shares through
authorized payroll deductions at 85% of the average market price on the last day
of each quarter. The ESPP qualifies as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. The Company has reserved 300,000
shares of its authorized but unissued common stock for issuance under the ESPP
of which 290,049 remain available at December 31, 1998.
49
13. COMMON STOCK
In February 1998, the Company's Board of Directors authorized the Company
to repurchase up to $10,000,000 of the Company's common stock. As of December
31, 1998, the Company has repurchased 157,000 shares of its common stock for
approximately $1,651,000.
The repurchase program was amended by the Board of Directors to authorize
the Company to purchase up to $10 million of the 7% Convertible Subordinated
Notes or shares of Common Stock and to extend the program through December 31,
1999.
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31 are as follows:
----------------- ------------------- -------------------- ------------------
1998 1998 1997 1997
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------- ------------------- -------------------- ------------------
Cash and cash equivalents $ 18,556,641 $ 18,556,641 $ 15,185,841 $ 15,185,841
Marketable securities 37,102,867 37,102,867 50,233,553 50,233,553
Convertible subordinated notes 36,375,000 50,000,000 47,812,500 48,500,000
----------------- ------------------- -------------------- ------------------
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Cash and cash equivalents -- The carrying amount approximates fair value
because of the short maturity of these instruments.
Marketable securities -- The fair value is based on quoted market prices
or dealer quotes.
Convertible subordinated notes -- The fair value is based on quoted
marked prices or dealer quotes.
15. SUBSEQUENT EVENTS
In January 1999, the Company repurchased $3,000,000, or 6%, of its
outstanding 7% convertible subordinated notes for $2,250,000. As a result, the
Company recognized an extraordinary gain of approximately $650,000, net of
deferred finance charges of $100,000.
F-19
50
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATRIX LABORATORIES, INC.
(Registrant)
Date: March 23, 1999 By: /s/ John E. Urheim
-------------------------------
John E. Urheim
Vice Chairman of the Board of
Directors and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ David R. Bethune Director Date: March 18, 1999
- ---------------------------------
David R. Bethune
/s/ H. Stuart Campbell Director Date: March 23, 1999
- ---------------------------------
H. Stuart Campbell
/s/ Dr. D. Walter Cohen Director Date: March 18, 1999
- ---------------------------------
Dr. D. Walter Cohen
/s/ Michael R. Duncan Vice President of Manufacturing Date: March 23, 1999
- ---------------------------------
Michael R. Duncan
/s/ Richard Dunn Senior Vice President of Drug Date: March 23, 1999
- --------------------------------- Delivery
Richard Dunn
/s/ Dr. Richard Jackson Senior Vice President of Research Date: March 23, 1999
- --------------------------------- and Development
Dr. Richard Jackson
/s/ Dr. J. Steven Garrett Vice President of Clinical Research Date: March 23, 1999
- ---------------------------------
Dr. J. Steven Garrett
/s/ Elaine M. Gazdeck Vice President of Regulatory Date: March 23, 1999
- --------------------------------- Affairs & Quality Assurance
Elaine M. Gazdeck
/s/ Dr. Jere E. Goyan Director Date: March 23, 1999
- ---------------------------------
Dr. Jere E. Goyan
/s/Dr. R. Bruce Merrifield Director Date: March 18, 1999
- ---------------------------------
Dr. R. Bruce Merrifield
/s/ C. Rodney O'Connor Director Date: March 19, 1999
- ---------------------------------
C. Rodney O'Connor
51
/s/ William C. O'Neil, Jr. Chairman of the Board of Directors Date: March 22, 1999
- ---------------------------------
William C. O'Neil, Jr.
/s/ David Osborne Vice President of Pharmaceutical Date: March 23, 1999
- --------------------------------- Development
David Osborne
/s/ Brian G. Richmond Vice President of Finance and Date: March 23, 1999
- --------------------------------- Assistant Secretary
Brian G. Richmond
Director Date: March __, 1999
- ---------------------------------
G. Lee Southard
/s/ John E. Urheim Vice Chairman of the Board of Date: March 23, 1999
- --------------------------------- Directors and Chief Executive
John E. Urheim Officer
52
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Reorganization dated November 24,
1998 by and among Atrix Laboratories, Inc., Atrix
Acquisition Corporation and ViroTex Corporation(6)
2.2 Certificate of Merger of Atrix Acquisition Corporation into
ViroTex Corporation dated November 24, 1998(6)
3.1 Amended and Restated Certificate of Incorporation*
3.2 Seventh Amended and Restated Bylaws(1)
4.1 Form of Common Stock Certificate(2)
4.2 Indenture, dated November 15, 1997, by and among the
Registrant and State Street Bank and Trust company of
California, N.A., as trustee thereunder(4)
4.3 Form of Note (included in Indenture, see Exhibit 4.2)
4.4 Rights Agreement (including form of Right Certificate, as
Exhibit A, and form of Summary of Rights, as Exhibit B)(5)
4.5 Warrant to purchase 6,750 shares of Atrix Common Stock
issued to Gulfstar Investments, Limited*
10.1 Employment Agreement between Registrant and John E. Urheim
dated June 4, 1993(2)
10.2 Lease Agreement dated May 11, 1991 between the Registrant
and GB Ventures(2)
10.3 Agreement dated December 16, 1996 between the Registrant
and Block Drug Corporation(3)
10.3A First Amendment to Block Agreement dated June 10, 1997*,**
10.3B Second Amendment to Block Agreement dated July 31, 1997*,**
10.3C Third Amendment to Block Agreement dated February 4,
1998*,**
10.3D Fourth Amendment to Block Agreement dated January 12,
1999*,**
10.3E Fifth Amendment to Block Agreement dated January 27,
1999*,**
10.4 Registration Rights Agreement, dated as of November 15,
1997, by and among Registrant and NationsBanc Montgomery
Securities, Inc. and SBC Warburg Dillon Read, Inc.(4)
10.5 Amended and Restated Performance Stock Option Plan, as
amended.*
10.6 Non-Qualified Stock Option Plan, as amended.*
10.7 Employment Agreement between Registrant and Dr. J. Steven
Garrett dated April 17, 1995*
10.8 Employment Agreement between Registrant and Rees M. Orland
dated January 1, 1996*
10.9 Employment Agreement between Registrant and Dr. David W.
Osborne dated November 24, 1998*
10.10 Employment Agreement between Registrant and Dr. Richard L.
Jackson dated November 1, 1998*
21 Subsidiaries of the Registrant*
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
- -------------------
* Filed herewith.
** Confidential treatment requested.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, file number 333-43191.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993 as filed with the Securities and
Exchange Commission.
(3) Incorporated by reference to Registrant's Current Report on Form 8-K dated
December 16, 1996, as amended on May 20, 1998, as filed with the Securities
and Exchange Commission.
(4) Incorporated by reference to Registrant's Current Report on Form 8-K dated
November 6, 1997, as filed with the Securities and Exchange Commission.
(5) Incorporated by reference to Registrant's Registration Statement on Form
8-A, file number 000-18231.
(6) Incorporated by reference to Registrant's Current Report on Form 8-K dated
November 24, 1998, as filed with the Securities and Exchange Commission.