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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ________
Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____ ---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of
April 29, 2003 was 20,540,947.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
ASSETS
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 16,181 $ 30,698
Marketable securities available-for-sale, at fair value ......................... 79,601 81,767
Accounts receivable, net of allowance for doubtful accounts of $647 and $623 ... 6,700 6,140
Note receivable - milestone payment ............................................. 6,000 --
Interest receivable ............................................................. 512 679
Inventories, net of reserve of $150 and $0 ...................................... 10,097 8,694
Prepaid expenses and deposits ................................................... 2,269 2,253
--------- ---------
Total current assets ....................................................... 121,360 130,231
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET ............................................... 19,511 15,431
--------- ---------
OTHER ASSETS:
Goodwill ........................................................................ 399 399
Intangible and other assets, net of accumulated amortization of $3,322 and $3,116 3,796 3,964
--------- ---------
Other assets ............................................................... 4,195 4,363
--------- ---------
TOTAL ASSETS ............................................................. $ 145,066 $ 150,025
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ........................................................ $ 2,863 $ 7,261
Accrued expenses and other ...................................................... 922 1,042
Deferred revenue ................................................................ 9,039 7,889
--------- ---------
Total current liabilities .................................................. 12,824 16,192
--------- ---------
DEFERRED REVENUE ................................................................. 40,820 37,064
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE EXCHANGEABLE PREFERRED STOCK:
Series A convertible exchangeable preferred stock, $.001 par value, 20,000 shares
authorized; 14,274 and 13,787 shares issued and outstanding. Liquidation
preference $14,471 and $14,227 ................................................ 14,759 14,514
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized Series A
preferred stock, $.001 par value, 200,000 shares authorized,
none issued or outstanding ................................................ -- --
Common stock, $.001 par value; 45,000,000 shares authorized; 20,539,676 and
20,516,069 shares issued and 19,709,376 and 19,858,369 shares outstanding ... 21 21
Additional paid-in capital ..................................................... 242,889 242,699
Treasury stock, 830,300 and 657,700 shares, at cost ............................ (13,010) (10,740)
Accumulated other comprehensive income ......................................... 1,073 1,590
Accumulated deficit ............................................................ (154,310) (151,315)
--------- ---------
Total shareholders' equity ................................................ 76,663 82,255
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 145,066 $ 150,025
========= =========
See notes to the consolidated financial statements.
2
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------
2003 2002
-------------- ---------------
REVENUE:
Net sales and royalties................................................ $ 3,219 $ 1,159
Contract research and development revenue.............................. 4,310 2,495
Licensing, marketing rights and milestone revenue...................... 1,931 1,363
-------------- ---------------
Total revenue................................................ 9,460 5,017
-------------- ---------------
OPERATING EXPENSE:
Cost of sales.......................................................... 1,428 530
Research and development............................................... 8,692 6,561
Administrative and marketing........................................... 2,855 1,823
Administrative - stock and stock option compensation................... 22 1,257
Loss on extinguished debt.............................................. --- 14
-------------- ---------------
Total operating expense...................................... 12,997 10,185
-------------- ---------------
LOSS FROM OPERATIONS.................................................... (3,537) (5,168)
-------------- ---------------
OTHER INCOME (EXPENSE):
Equity in loss of joint venture........................................ (74) (410)
Investment income...................................................... 739 1,354
Gain (loss) on sale of marketable securities........................... 120 (71)
Interest expense....................................................... --- (129)
Debt conversion expense................................................ --- (125)
Other.................................................................. 1 2
-------------- ---------------
Net other income............................................. 786 621
-------------- ---------------
NET LOSS ............................................................. (2,751) (4,547)
Accretion of dividends on preferred stock............................... (244) (228)
-------------- ---------------
NET LOSS APPLICABLE TO COMMON STOCK..................................... $ (2,995) $ (4,775)
============== ===============
Basic and diluted loss per common share:
Net loss......................................................... $ (.14) $ (.23)
Accretion of dividends on preferred stock........................ (.01) (.01)
-------------- ---------------
Net loss applicable to common stock.............................. $ (.15) $ (.24)
============== ===============
Basic and diluted weighted average common shares outstanding..... 19,741,591 19,928,654
============== ===============
See notes to the consolidated financial statements.
3
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $ (2,751) $ (4,547)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................ 722 731
Amortization of deferred revenue ............................. (2,144) (1,798)
Equity in loss of joint venture .............................. 74 410
Loss (gain) on sale of marketable securities ................. (120) 71
Stock and stock option compensation .......................... 22 1,257
Debt conversion expense ...................................... -- 125
Interest expense converted to equity ......................... -- 24
Loss on extinguished debt .................................... -- 14
Other non-cash items ......................................... 10 --
Net changes in operating assets and liabilities:
Accounts receivable .......................................... (488) (662)
Interest receivable .......................................... 167 (100)
Inventories .................................................. (1,373) (787)
Prepaid expenses and deposits ................................ (16) (524)
Accounts payable ............................................. (4,414) 834
Accrued expenses and other ................................... (123) --
Deferred revenue ............................................. 950 145
-------- --------
Net cash used in operating activities ............. (9,484) (4,807)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ................. (4,522) (1,092)
Investment in intangible and other assets .................... (38) (81)
Proceeds from maturity and sale of marketable securities ..... 8,738 3,443
Investment in marketable securities .......................... (7,096) (15,531)
Investment in joint venture .................................. (207) (7)
-------- --------
Net cash used in investing activities ............. (3,125) (13,268)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities, net of issuance
costs ..................................................... 168 1,173
Payments to acquire treasury stock .......................... (2,270) (671)
-------- --------
Net cash provided by (used in) financing activities (2,102) 502
-------- --------
NET EFFECT OF EXCHANGE RATE ON CASH .................................. 194 (79)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................ (14,517) (17,652)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................... 30,698 50,058
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................. $ 16,181 $ 32,406
======== ========
Non-cash investing and financing activities (in thousands):
2003
----
Issued restricted common stock valued at $22 as part of employment separation
agreements. Issued preferred stock valued at $487 to Elan for accreted
dividends.
2002
----
Issued common stock valued at $5,331 in exchange for $5,206 of the 7%
Convertible Subordinated Notes. Vested incentive stock options valued at
$1,257 for an executive officer in conjunction with his termination
agreement.
See notes to the consolidated financial statements.
4
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Atrix
Laboratories, Inc. and subsidiaries (collectively referred to as "Atrix" or the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim consolidated financial statements and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments considered necessary, consisting of normal recurring
accruals, for a fair presentation have been included. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto, for the year ended December 31, 2002,
filed with the Securities and Exchange Commission in the Company's Annual Report
on Form 10-K.
NOTE 2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Atrix Laboratories, Inc. was formed in August 1986 as a Delaware
corporation. In November 1998, the Company acquired ViroTex Corporation. In June
1999, the Company organized its wholly owned subsidiary Atrix Laboratories
Limited, which is based in London, England. In February 2000, the Company
organized its wholly owned subsidiary Atrix Laboratories GmbH, which is based in
Frankfurt, Germany, to conduct its European operations. In June 2000, the
Company entered into a research joint venture, Transmucosal Technologies, Ltd.,
with Elan International Services, Ltd. ("Elan"), a wholly owned subsidiary of
Elan Corporation, plc.
Atrix is an emerging specialty pharmaceutical company focused on
advanced drug delivery. With five unique patented drug delivery technologies,
the Company is currently developing a diverse portfolio of products, including
proprietary oncology, dermatology and pain management products. The Company also
forms strategic alliances with a variety of pharmaceutical and biotechnology
companies to develop products utilizing various drug delivery systems and/or to
commercialize products. These strategic alliances include collaborations with
Pfizer Inc., Sanofi-Synthelabo Inc., MediGene AG, Fujisawa Healthcare, Inc.,
Geneva Pharmaceuticals, Inc., Sosei Co. Ltd., and CollaGenex Pharmaceuticals,
Inc.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Atrix Laboratories, Inc. and its wholly owned subsidiaries Atrix Laboratories
Limited and Atrix Laboratories, GmbH. All significant intercompany transactions
and balances have been eliminated. While the Company initially owns 80.1% of
Transmucosal Technologies' outstanding common stock, Elan and its subsidiaries
have retained significant minority investor rights that are considered
"participating rights" as defined in Emerging Issues Task Force Consensus 96-16,
"Investor's Accounting for an Investee When the Investor Has a Majority of the
Voting Interest, but the Minority Shareholder or Shareholders Have Certain
Approval or Veto Rights." Elan's significant rights in Transmucosal Technologies
that are considered participating rights include equal representation in the
management of the joint venture and development of its business plan and
approval rights on the board of directors as it relates to the business plan.
Accordingly, the Company accounts for its investment in Transmucosal
Technologies under the equity method of accounting. Additionally, the joint
venture contracts with Atrix to perform certain research and development
activities.
REVENUE RECOGNITION
The Company recognizes revenue on product sales and contract
manufacturing at the time of shipment when title to the product transfers and
the customer bears risk of loss. Royalty revenue is recorded when product is
shipped by licensees based on the invoiced amount by the licensee and royalty
rates as specified in the agreement with the licensee.
5
All contract research and development is performed on a best effort
basis under signed contracts. Revenue under contracts with a fixed price is
recognized over the term of the agreement on a straight-line basis, which is
consistent with the pattern of work performed. Billings are made in accordance
with schedules as specified in each agreement, which generally include an
up-front payment as well as periodic payments. Payments received in advance of
revenue recognition are recorded as deferred revenue. Revenue under other
contracts is recognized based on terms as specified in the contracts, including
billings for time incurred at rates as specified in the contracts and as
reimbursable expenses are incurred. Such arrangements are regularly evaluated on
an individual basis. Billings under the contracts are made monthly.
Nonrefundable licensing fees, marketing rights and milestone payments
received under contractual arrangements are deferred and recognized over the
remaining contractual term using the straight-line method.
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 the Company's behalf. Additionally, licensing fees
paid by the Company to acquire technology are expensed as incurred if no
alternative future use exists. A portion of overhead costs is allocated to
research and development on a weighted-average percentage basis among all
projects under development.
The following table summarizes research and development activities
funded, in whole or in part, by our collaborators, as well as research and
development activities funded by the Company for the three months ended March 31
(amounts in thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
------ ------
Research and Development -- Funded ... $6,017 $2,800
Research and Development -- Not Funded 2,675 3,761
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Research and Development ........... $8,692 $6,561
====== ======
PRO FORMA EFFECT OF STOCK OPTION ISSUANCES
The Company accounts for the 1987 Plan, the 2000 Plan and the DSI Plan
options using the intrinsic value method. Accordingly, no compensation expense
has been recognized for stock option grants. Had compensation cost been
determined based on the fair value of the options at the grant dates of awards
under the 1987 Plan, 2000 Plan and DSI Plan consistent with SFAS No. 123, the
Company's net loss applicable to common stock and basic and diluted loss per
common share would have been changed to the pro forma amounts indicated below
(amounts in thousands, except share data):
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
--------- ---------
Net loss applicable to common stock:
-- as reported ........................... $ (2,995) $ (4,775)
-- pro forma ............................. (4,762) (7,310)
Basic and diluted net loss per common share:
-- as reported ........................... $ (0.15) $ (0.24)
-- pro forma ............................. (0.24) (0.37)
The weighted-average Black-Scholes fair value per option granted during the
period ending March 31, 2003 and 2002 was $6.50 and $12.18, respectively. The
fair value of options was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
grants during the period ending March 31, 2003 and 2002: no dividend yield,
expected volatility of 59.3% for 2003 and 60.3% for
6
2002, risk free interest rates of 5.0% in 2003 and 2002, and expected life of
five years.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations" was issued by the Financial Accounting Standards Board (FASB). SFAS
No. 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs and applies to all entities. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. The Company adopted
SFAS No. 143 on January 1, 2003. The adoption of this statement did not have an
impact on the Company's consolidated financial position or results of operations
in the first quarter of 2003.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was
issued by the FASB. SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and an amendment of that Statement,
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers." This Statement amends FASB Statement
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
adopted SFAS No. 145 in the first quarter of 2003 and as a result, the
comparative financial statements were restated to reclassify the extraordinary
loss on extinguishment of debt to be included in loss from operations.
In August 2002, SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" was issued by the FASB. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity is to be recognized when the liability is incurred. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of this statement did not have an impact
on the Company's consolidated financial position or results of operations in the
first quarter of 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. FIN
45 also requires additional disclosures about the guarantees an entity has
issued, including a roll-forward of the entity's product warranty liabilities.
The Company will apply the recognition provisions of FIN 45 prospectively to
guarantees issued or modified after December 31, 2002. The disclosure
requirements were effective for the Company's financial statements for the year
ended December 31, 2002. The adoption of FIN 45 did not have an impact on the
Company's consolidated financial position or results of operation in the first
quarter of 2003.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 provides guidance on how
to identify a variable interest entity (VIE) and determine when the assets,
liabilities, and results of operations of a VIE need to be included in a
company's consolidated financial statements. FIN 46 also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders in a VIE. The provisions of FIN 46 are effective immediately for all
VIEs created after January 31, 2003. For VIEs created before February 1, 2003,
the provisions of FIN 46 must be adopted at the beginning of the first interim
or annual reporting period beginning after June 15, 2003. The adoption of FIN 46
is not expected to have a material impact on the Company's consolidated
financial position or results of operation.
In November 2002, the Emerging Issues Task Force (EITF) issued EITF
Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 addresses how to determine whether a revenue
arrangement involving multiple deliverables contains more than one unit of
accounting for the purposes of revenue recognition and how the revenue
arrangement consideration should be measured and allocated to the separate units
of accounting. EITF Issue No. 00-21 applies to all revenue arrangements that the
Company enters into
7
after June 30, 2003. The Company has not yet determined the impact, if any, that
EITF Issue No. 00-21 will have on its consolidated financial position and
results of operations.
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. Inventories include the cost of
materials, direct labor and overhead. The components of inventory are as follows
as of March 31, 2003 and December 31, 2002 (amounts in thousands):
March 31, 2003 December 31, 2002
-------------- -----------------
Raw materials . $ 6,723 $ 6,590
Work in process 586 1,035
Finished goods 2,938 1,069
Reserve ....... (150) --
-------- --------
$ 10,097 $ 8,694
======== ========
NOTE 4. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share excludes dilution and is
computed by dividing net income (loss) by the weighted-average number of common
shares outstanding during the periods presented. Diluted net income (loss) per
common share reflects the potential dilution of securities that could
participate in the earnings. Stock options, warrants outstanding and their
equivalents are included in diluted earnings per share computations through the
"treasury stock" method unless they are antidilutive. Convertible securities are
included in diluted earnings per share computations through the "if converted"
method unless they are antidilutive. There was no diluted effect on earnings per
share computations for the assumed conversion of the Series A Convertible
Preferred Stock shares under the "if converted" method. Additionally, since the
Company has not drawn any proceeds under the convertible promissory note
agreement with Elan, as of March 31, 2003, there was no effect on earnings per
share computations pertaining to this convertible promissory note for the
periods presented. Common share equivalents are excluded from the computations
in loss periods, as their effect would be antidilutive. For the three months
ended March 31, 2003 and 2002, approximately 13,000 and 1.4 million equivalent
dilutive securities (primarily convertible notes and common stock options),
respectively, have been excluded from the weighted-average number of common
shares outstanding for the diluted net loss per share computations as they are
antidilutive.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as information contained elsewhere
in this Report, contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements include statements
regarding the intent, belief or current expectations of us, our directors or our
officers with respect to, among other things: (1) whether we will receive, and
the timing of, regulatory approvals or clearances to market potential products;
(2) the results of current and future clinical trials; (3) the time and expenses
associated with the regulatory approval process for products; (4) the safety and
effectiveness of our products and technologies; (5) the Company's expectation
that its marketing partners will be able to successfully market its products;
(6) its expectation of receiving royalties on sales of its products and its
plans to manufacture certain of its products at its facility in Fort Collins,
Colorado; (7) the timing of new product launches; and (8) expected future
additional equity losses for Transmucosal Technologies, Ltd. The success of our
business operations is dependent on factors such as the receipt and timing of
regulatory approvals or clearances for potential products, the effectiveness of
our marketing strategies to market our current and any future products, our
ability to manufacture products on a commercial scale, the appeal of our mix of
products, our success at entering into and collaborating with others to conduct
effective strategic alliances and joint ventures, general competitive conditions
within the biotechnology and drug delivery industry and general economic
conditions. Forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. Actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors, including those described below under "Item 1.-Business-Factors
Affecting Our Business and Prospects" in our Annual Report on Form 10-K for the
year ended December 31, 2002.
OVERVIEW
We are an emerging specialty pharmaceutical company focused on advanced
drug delivery. With five unique patented drug delivery technologies, we are
currently developing a diverse portfolio of products, including proprietary
oncology, dermatology and pain management products. We also form strategic
alliances with a variety of pharmaceutical and biotechnology companies to
develop products utilizing our various drug delivery systems and/or to
commercialize our products. These strategic alliances include collaborations
with Pfizer, Inc., Sanofi-Synthelabo, Inc., MediGene AG, Fujisawa Healthcare,
Inc., Geneva Pharmaceuticals, Inc., Sosei Co. Ltd. and CollaGenex
Pharmaceuticals, Inc.
Our drug delivery systems deliver controlled amounts of drugs in time
frames ranging from minutes to months to address a range of therapeutic and
patient needs. Atrigel is our original proprietary sustained release
biodegradable polymer drug delivery system. The Atrigel system may provide
benefits over traditional methods of drug administration such as safety and
effectiveness, ease of applications, site-specific or systemic delivery,
customized release rates and biodegradability. With the acquisition of ViroTex
Corporation in November 1998, we added four additional drug delivery systems:
BEMA(TM), SMP(TM), MCA(TM) and BCP(TM).
RECENT DEVELOPMENTS
The following discussion highlights significant events for our company
during the three months ended March 31, 2003:
Eligard 30-mg four-month product
We received approval from the FDA for our Eligard 30-mg four-month
product in February 2003. In March 2003, Sanofi-Synthelabo launched the product
into the U.S. market and we received a $6.0 million milestone payment in April
2003 for the first commercial sale of the Eligard 30-mg four-month product.
Eligard International
In January 2003, we entered into an exclusive licensing agreement with
Sosei Co., Ltd. to develop and commercialize our Eligard products in Japan. We
received an up-front license fee of $0.9 million and may receive payments for
research and development support and payments for specific clinical, regulatory
and sales milestones.
9
In addition to the milestone payments, we will receive royalty payments based on
sales of the Eligard products upon approval for marketing by the Japanese
Ministry of Health, Labor and Welfare, or MHLW. Sosei will be responsible for
submission of the necessary documents to obtain marketing authorization from the
MHLW. We will manufacture the Eligard products for Sosei at our Fort Collins'
facility and will earn manufacturing margins.
Other Products
In January 2003, we announced the submission of three Abbreviated New
Drug Applications, or ANDAs, to the FDA for approval of generic formulations of
undisclosed dermatology products, bringing our total ANDA submissions to seven,
which are all currently under FDA review.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2002
Total revenue for the three months ended March 31, 2003 was $9.5
million compared to $5.0 million for the three months ended March 31, 2002,
representing a 90% increase.
Net sales and royalties were $3.2 million for the three months ended
March 31, 2003 compared to $1.2 million for the three months ended March 31,
2002, representing a 167% increase. This increase is primarily related to the
recognition of $1.8 million in sales and royalties of our Eligard products and
increase in sales of $0.5 million of Atridox sales in Europe. This increase was
offset by $0.3 million decrease in sales from contract manufacturing, which was
discontinued in September 2002. We expect net sales and royalty revenues to
increase in 2003 as a result of a full year of product sales of our Eligard
7.5-mg one-month and Eligard 22.5-mg three-month products launched in May 2002
and September 2002, respectively. Additionally, the FDA approved our Eligard
30-mg four-month product in February 2003, which was launched in March 2003.
Contract research and development revenue represents revenue we earned
from unaffiliated third parties and from our joint venture with Elan for
performing contract research and development activities using our various
patented drug delivery technologies. Contract research and development revenue
was $4.3 million for the three months ended March 31, 2003 compared to $2.5
million for the three months ended March 31, 2002, representing a 72% increase.
This increase is primarily related to a $2.1 million increase in revenue from
Fujisawa for partial funding of Atrisone research costs and a $0.5 million
increase in revenue from Sanofi-Synthelabo for funding of an Eligard 45-mg
six-month formulation. These increases were offset by a $0.4 million decrease in
revenue from research activities funded by other parties and a $0.4 million
decrease in revenue recognized in conjunction with our joint venture as a result
of the completion of feasibility work performed by us. We cannot be certain
whether contract research and development revenue from our partner-funded
research and development expenses will increase or decrease for the foreseeable
future as the timing of such expenses being incurred may vary. Accordingly, the
revenue recognition may vary depending on the terms of the corresponding
agreements.
Licensing, marketing rights and milestone revenue for the three months
ended March 31, 2003 was $1.9 million compared to $1.4 million for the three
months ended March 31, 2002, representing a 36% increase. This increase is
primarily related to the recognition of $0.4 million in additional milestone
revenue for our Eligard products under the Sanofi-Synthelabo agreement and the
recognition of $0.1 million of additional revenue for our Eligard products under
various international partner agreements. We expect licensing, marketing and
milestone revenue to increase in 2003 as a result of a full year of revenue
recognition from licensing and milestone payments received from our marketing
partners in 2002 and recognition of licensing and milestone payments that we may
receive from our current or future partners, including a $6.0 million milestone
payment we received from Sanofi in April 2003 for the first commercial sale of
our Eligard four-month product. All milestone and licensing payments received
are deferred and recognized over the remaining term of the related agreement.
Cost of sales for the three months ended March 31, 2003 was $1.4
million compared to $0.5 million for the three months ended March 31, 2002,
representing a 180% increase. This increase relates to the costs associated with
sales of our Eligard 7.5-mg one-month, Eligard 22.5-mg three-month and Eligard
30-mg four-month products and European sales of Atridox. We expect that cost of
sales will increase in the future as sales of our products increase.
10
Research and development expenses for the three months ended March 31,
2003 were $8.7 million compared to $6.6 million for the three months ended March
31, 2002, representing a 32% increase. An increase of $2.4 million was related
to clinical costs associated with Phase III studies of our Atrisone acne
product, an increase of $0.5 million was related to the development of our
generic dermatology products and an increase of $0.5 million was related to
research activities for our octreotide project. These increases were offset by a
decrease in research and development of $1.3 million on other projects including
joint venture activities, Eligard development, BEMA development and research for
various partner-funded projects. We cannot be certain whether our partner-funded
research and development expenses will increase or decrease for the foreseeable
future as the timing of such expenses being incurred may vary depending on the
terms of the corresponding agreements. However, we expect that research and
development expenses for internally funded activities will decrease in 2003 due
to our current focus on completion of Atrisone clinical studies and development
of generic dermatology products. Following completion of these programs, we
expect internal product development expenses to increase again in the
foreseeable future.
Administrative and marketing expenses, excluding stock and stock option
compensation, for the three months ended March 31, 2003 were $2.9 million
compared to $1.8 million for the three months ended March 31, 2002, representing
a 61% increase. The increase is primarily related to increased European sales
and marketing efforts for Atridox of $0.7 million, costs associated with
potential acquisitions of $0.3 million and increased general administrative
support of $0.1 million. We expect that our administrative and marketing
expenses will increase for the foreseeable future as we continue to grow.
Administrative - stock and stock option compensation for the three
months ended March 31, 2003 was $22,000 compared to $1.3 million for the three
months ended March 31, 2002. A charge of $22,000 for the three months ended
March 31, 2003 was recognized for the issuance of restricted shares of common
stock to various employees in conjunction with employment separation agreements.
A charge of $1.3 million for the three months ended March 31, 2002 was
recognized in connection with the retirement of an executive officer. We may, in
the future, incur additional costs for stock compensation and performance-based
compensation activities, however, we cannot predict if or when that may happen
or what the cost may be.
We recognized a loss of $0.1 million for the three months ended March
31, 2003 for our 80.1% equity share in the loss of Transmucosal Technologies,
our joint venture with Elan, compared to a loss of $0.4 million for the three
months ended March 31, 2002, representing a 75% decrease. The decrease was
primarily related to the completion of feasibility work performed through the
joint venture. The two joint venture projects are currently under review for
further development and as a result, the amount and timing of future recognition
of equity in loss of our joint venture is uncertain at this time.
Investment income for the three months ended March 31, 2003 was $0.7
million compared to $1.4 million for the three months ended March 31, 2002,
representing a 50% decrease. The decrease was primarily the result of a decrease
in our average cash, cash equivalents and available-for-sale marketable
securities balances. The average balance for the three months ended March 31,
2003 was $102.6 million compared to an average balance of $134.8 million for the
three months ended March 31, 2002. In addition, interest rates on investments in
the first quarter of 2003 were lower compared to the first quarter of 2002. For
the three months ended March 31, 2003, the average rate on our portfolio was
3.25% compared to 3.76% for the three months ended March 31, 2002. We expect
investment income to decrease in 2003 as a result of expected lower average cash
and cash equivalents and marketable securities balances compared to 2002
balances.
Gain on sale of marketable securities for the three months ended March
31, 2003 was $0.1 million compared to a loss of $0.1 million for the three
months ended March 31, 2002. The gain on sale of marketable securities in the
first quarter of 2003 was due to the sale of one of our government bonds,
compared to the loss on sale of marketable securities in the same period of 2002
as a result of the sale of one of our corporate notes. We cannot be certain
whether we will incur gains or losses on the sale of marketable securities in
the future.
Interest expense for the three months ended March 31, 2003 was $0
compared to $0.1 million for the three months ended March 31, 2002. This
decrease was due to the exchange of 151,300 shares of our common stock for $2.9
million in principal amount of our 7% Convertible Subordinated Notes since the
period ended March 31, 2002. Interest expense is expected to decrease in 2003
due to the full conversion of our 7% Convertible Subordinated Notes as of May
2002.
11
Due to the conversion of the balance of our outstanding 7% Convertible
Subordinated Notes as of May 2002, there was no debt conversion expense
recognized for the three months ended March 31, 2003, compared to 0.1 million
for the quarter ended March 31, 2002. During the three months ended March 31,
2002, we exchanged 128,601 shares of our common stock for $2.3 million of our 7%
Convertible Subordinated Notes. Of the 128,601 shares issued, 122,684 shares
were valued at the conversion price of $19.00 per share and the remaining 5,917
shares were valued at $21.09 per share, the closing market price of our common
stock on the date of exchange. As a result, we recognized aloss on extinguished
debt of approximately $14,000 for the write-off of $38,000 of pro rata
unamortized deferred finance charges net of $24,000 interest expense payable
eliminated as a result of these exchanges. Additionally, for the remaining 5,917
shares exchanged, a debt conversion expense of approximately $0.1 million was
recognized for the three months ended March 31, 2002.
We issued shares of Series A Convertible Exchangeable Preferred Stock
to Elan in July 2000 in connection with the formation of our joint venture with
Elan. Related to this issuance, we recognized $0.2 million for accretion of
dividends on the shares of preferred stock for the three months ended March 31,
2003 compared to $0.2 million for the three months ended March 31, 2002.
For the reasons described above, we recorded a consolidated net loss
applicable to common stock of $3.0 million, or $0.15 per share, for the three
months ended March 31, 2003 compared to a consolidated net loss applicable to
common stock of $4.8 million, or $0.24 per share, for the three months ended
March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had cash and cash equivalents of $16.2
million, marketable securities (at fair value) of $79.6 million, net accounts
receivable of $6.7 million, note receivable - milestone payment of $6.0 million,
inventories of $10.1 million and other current assets of $2.8 million for total
current assets of $121.4 million. We had accounts payable of $2.9 million,
short-term deferred revenue of $9.0 million and other current liabilities of
$0.9 million for total current liabilities of $12.8 million, which resulted in
working capital of $108.6 million.
During the three months ended March 31, 2003, net cash used in
operating activities was $9.5 million. This was primarily the result of the net
loss for the period of $2.8 million, adjusted for certain non-cash expenses, and
changes in operating assets and liabilities as set forth in the consolidated
statements of cash flows. We recognized a cash inflow from the receipt of
deferred milestone payments, licensing fees and certain contract research and
development payments of $1.0 million, offset by amortization of deferred revenue
of $2.1 million. Other significant uses of cash included: $1.4 million due to
increasing inventory levels primarily related to the production of our Eligard
products and inventory buildup related to our generic dermatology product and
$4.4 million decrease in accounts payable primarily related to payments for
inventory raw materials and components and plant expansion costs.
Net cash used in investing activities was $3.1 million during the three
months ended March 31, 2003. This was primarily due to $7.1 million used to fund
the purchases of various available-for-sale marketable securities offset by
proceeds received from the maturity and sale of available-for-sale marketable
securities of $8.7 million. During the first quarter of 2003, various marketable
securities matured or were called and the proceeds were subsequently reinvested
in high rated corporate notes, U.S. government securities, and diversified bond
mutual funds to minimize our exposure to credit risk. In addition, cash used in
investing activities included $4.5 million for capital expenditures primarily
related to our plant expansion as discussed further under "Future Capital
Requirements" below.
Net cash used in financing activities was $2.1 million during the three
months ended March 31, 2003. This was primarily the result of the repurchase of
$2.3 million of our common stock in the open market. In September 2001, our
Board of Directors approved a stock repurchase program to acquire up to $5.0
million of our common stock. In July 2002, our Board of Directors approved an
amendment to the program to increase the total amount of common stock that can
be purchased under the program from a maximum of $5.0 million to a maximum of
$15.0 million. In November 2002, our Board of Directors amended our stock
repurchase program to provide that we may acquire up to a maximum of $20.0
million of our common stock in the open market or in privately negotiated
transactions under this program. The program terminates on the earlier of the
date that we have repurchased $20.0 million of our common stock or December 31,
2003. Since the inception of the program, we
12
repurchased a total of 830,300 shares of our common stock in the open market for
$13.0 million, or an average price per share of $15.67. For the three months
ended March 31, 2003, we repurchased 172,600 shares of our common stock in the
open market for $2.3 million, or an average share price per share of $13.15
under the program. As of March 31, 2003, $7.0 million remains available to
repurchase our common stock under the program.
In July 2000, we formed Transmucosal Technologies, a joint venture,
with Elan to develop and commercialize oncology and pain management products.
Subject to the satisfaction of certain conditions, Elan has agreed to loan us up
to $8.0 million under a convertible promissory note agreement in support of our
80.1% share of the joint venture's research and development costs. The note has
a six-year term, will accrue interest at 7% per annum, compounded semi-annually
and added to principal, and is convertible at Elan's option into our common
stock at a $14.60 conversion price. As of March 31, 2003, we had not drawn any
amounts under the note. We are required to fund our 80.1% share of the joint
venture's obligations. This cash funding totaled $0.2 million for the three
months ended March 31, 2003 and $7,000 for the three months ended March 31,
2002. The two joint venture projects are currently under review for further
development and the outcome of the review may effect future funding obligations.
We have a revolving line of credit with a bank that expires in May
2003. Under the terms of the line of credit, we may borrow up to $1.0 million.
Borrowings under the line bear interest at the prime rate and are subject to
financial covenants requiring us to maintain certain levels of net worth and
liquidity. Additionally, in June 2002, we established a second $1.0 million bank
line of credit that expires in June 2003. Borrowings under the line bear
interest at a rate of 5.25%. As of March 31, 2003, there was no obligation
outstanding under either of these credit agreements.
We have historically funded our operations through debt and equity
offerings, payments received for licenses, milestones and research and
development support under contractual arrangements and, to a lesser extent,
product sales and royalties. We anticipate future funding of our operations to
be achieved through continued licensing fees, milestone payments and net sales
and royalties of our products. At March 31, 2003, we had $16.2 million of cash
and cash equivalent investments and $79.6 million of available-for-sale
marketable securities (at fair value) to fund future operations and capital
requirements. Our available-for-sale marketable securities include primarily
U.S. government bonds, diversified bond mutual funds and investment grade
corporate notes. Our portfolio of corporate notes is diversified and, under our
policy, we only invest in investment grade corporate notes. We believe the
quality of the notes we hold and the diversity of our portfolio significantly
mitigates our credit and market risks; however from time to time we have
experienced investment losses as some of the issuers of our investment grade
corporate notes have declared bankruptcy. We believe that we have adequate
liquidity and capital resources to fund our operations and capital requirements
for the foreseeable future. However, we may have to raise additional funds to
complete the development of our technologies as discussed below.
At December 31, 2002 we had available for Federal income tax purposes,
net operating loss carry-forwards of $92.4 million and $3.8 million in research
and development tax credits, which expire through 2022. Our ability to utilize
our purchased net operating loss acquired with the acquisition of ViroTex,
alternative minimum tax, and research and development credit carry-forwards is
subject to an annual limitation in future periods. This is pursuant to the
"change in ownership" rules under Section 382 of the Internal Revenue Code of
1986, as amended.
FUTURE CAPITAL REQUIREMENTS
Our long-term capital expenditure requirements will depend on numerous
factors, including:
o the progress of our research and development programs,
o the time required to file and process regulatory approval
applications,
o the development of our commercial manufacturing facilities,
o the potential for expenses related to the implementation of
a specialty sales force,
o our ability to obtain additional licensing arrangements, and
o the demand for our products.
We expect to continue to incur substantial expenditures for research
and development, testing, regulatory compliance, market development in European
countries, possible repurchases of our common stock and to hire additional
management, scientific, manufacturing and administrative personnel. We will also
continue to expend a
13
significant amount of funds for our ongoing clinical studies. Depending on the
results of our research and development activities, we may determine to
accelerate or expand our efforts in one or more proposed areas and may,
therefore, require additional funds earlier than previously anticipated. We
believe the existing cash and cash equivalent assets in addition to marketable
security resources will be sufficient to fund our operations for the foreseeable
future. However, underlying assumed levels of revenue and expense may not prove
to be accurate.
Research and development
The following table summarizes research and development activities
funded by our collaborators, as well as research and development activities
funded by us, for the years ended December 31, 2002, 2001 and 2000 and the three
months ended March 31, 2003, including research and development costs
inception-to-date and estimated completion dates and costs (in thousands):
EXPENSES FUNDED ANTICIPATED
2003 EXPENSES EXPENSES ANTICIPATED COSTS TO
EXPENSES EXPENSES EXPENSES (AS OF INCEPTION- INCEPTION- COMPLETION COMPLETION
TECHNOLOGY 2000 2001 2002 MARCH 31) TO-DATE TO-DATE (TO MARKET) (TO MARKET)
---------- -------- -------- -------- -------- ---------- ---------- ------------ -----------
Atrigel .. $ 10,845 $ 13,727 $ 13,011 $ 2,913 $113,434 $ 10,095 2003 -- 2009 $ 70,000
SMP ...... 3,090 4,604 6,547 3,773 20,340 8,213 2005 25,000
BEMA ..... 259 2,397 2,582 184 5,976 1,036 2006 -- 2007 10,000
Other .... 2,541 4,907 10,599 1,822 35,390 11,093 2003 -- 2007 30,000
-------- -------- -------- -------- -------- -------- ------------ --------
Total $ 16,735 $ 25,635 $ 32,739 $ 8,692 $175,140 $ 30,437 2003 -- 2009 $135,000
======== ======== ======== ======== ======== ======== ============ ========
Funded ... $ 1,921 $ 10,626 $ 18,721 $ 6,017
Not Funded 14,814 15,009 14,018 2,675
-------- -------- -------- --------
Total $ 16,735 $ 25,635 $ 32,739 $ 8,692
======== ======== ======== ========
The predominate product lines included under the Atrigel technology are
the Eligard and dental products which comprise 59% and 30%, respectively, of the
expenses inception-to-date. Recently, the Eligard products comprised more of the
research and development effort with 68%, 64%, 59% and 52% of the 2000, 2001,
2002 and year-to-date 2003 Atrigel expenses, respectively. As dental products
have moved into market, expenses to support them have stabilized and comprised
25%, 10%, 7% and 6% of the 2000, 2001, 2002 and year-to-date 2003 Atrigel
expenses, respectively. Of the expenses funded by third parties, 16% of funds
received were to support the dental products, 44% of funds have come recently to
support the Eligard products, and 40% of funds have come from direct support of
research contracts with various companies.
The Atrisone acne product represents 100% of expenses and funding under
the SMP technology.
Under the BEMA technology, 49% of expenses inception-to-date relate to
the development of two products through our joint venture with Elan and 100% of
funding for BEMA research and development has come from the joint venture.
Other research and development expenses inception-to-date represent
efforts to introduce additional products into our product pipeline. Expenses
related to develop generic dermatology products are also included in this
category and represent 33% of expenses incurred to date and 46% of funding.
Plant expansion
In April 2002, we announced our plans to expand our manufacturing and
laboratory facilities to support current and future projects. The current 26,000
square foot facility is being expanded to 58,000 square feet. In the expanded
facility we intend to produce the full line of our Eligard prostate cancer
products, Atrisone topical dermatological product, generic dermatology products,
dental products and clinical supplies for products currently in development.
Approximately 40% of the building expansion will be devoted to production with
the remainder allotted for warehousing, quality assurance and laboratory work.
Construction began in the second quarter of 2002 and we anticipate completion of
construction during the second quarter of 2003. Once construction is completed,
an extensive FDA certification of the plant and equipment is required, which
could take up to five months. Construction costs are estimated to be
approximately $9.4 million with additional expenditures to be incurred as needed
for equipment. The total estimated construction cost includes building design
and construction of $5.9
14
million plus $3.5 million for the addition of an area for future lab expansion,
an upgrade of the water system, the addition of an emergency generator, a
building management system and facility validation. As of March 31, 2003,
approximately $8.4 million has been spent on construction costs and $1.8 million
has been spent on related equipment and equipment deposits.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations" was issued by the Financial Accounting Standards Board (FASB). SFAS
No. 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs and applies to all entities. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. We adopted SFAS No.
143 on January 1, 2003. The adoption of this statement did not have an impact on
our consolidated financial position or results of operations in the first
quarter of 2003.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was
issued by the FASB. SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and an amendment of that Statement,
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers." This Statement amends FASB Statement
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. We adopted
SFAS No. 145 in the first quarter of 2003 and as a result, the comparative
financial statements were restated to reclassify the extraordinary loss on
extinguishment of debt to be included in loss from operations.
In August 2002, SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" was issued by the FASB. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity is to be recognized when the liability is incurred. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of this statement did not have an impact
on our consolidated financial position or results of operations in the first
quarter of 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. FIN
45 also requires additional disclosures about the guarantees an entity has
issued, including a roll-forward of the entity's product warranty liabilities.
We will apply the recognition provisions of FIN 45 prospectively to guarantees
issued or modified after December 31, 2002. The disclosure requirements were
effective for our financial statements for the year ended December 31, 2002. The
adoption of FIN 45 did not have an impact on our consolidated financial position
or results of operations for the first quarter of 2003.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 provides guidance on how
to identify a variable interest entity (VIE) and determine when the assets,
liabilities, and results of operations of a VIE need to be included in a
company's consolidated financial statements. FIN 46 also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders in a VIE. The provisions of FIN 46 are effective immediately for all
VIEs created after January 31, 2003. For VIEs created before February 1, 2003,
the provisions of FIN 46 must be adopted at the beginning of the first interim
or annual reporting period beginning after June 15, 2003. The adoption of FIN 46
is not expected to have a material impact on our consolidated financial position
or results of operations.
In November 2002, the Emerging Issues Task Force (EITF) issued EITF
Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 addresses how to determine whether a revenue
arrangement involving multiple deliverables contains more than one unit of
accounting for the purposes of
15
revenue recognition and how the revenue arrangement consideration should be
measured and allocated to the separate units of accounting. EITF Issue No. 00-21
applies to all revenue arrangements that we enter into after June 30, 2003. We
have not yet determined the impact, if any, that EITF Issue No. 00-21 will have
on our consolidated financial position and results of operations.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are described in Note 1 to the
Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended December 31, 2002. The accounting policies used in preparing our
interim consolidated financial statements for the three months ended March 31,
2003 are the same as those described in our Annual Report on Form 10-K.
Our critical accounting policies are those having the most impact to
the reporting of our financial condition and results and those requiring
significant judgments and estimates. Our critical accounting policies, which are
included in Note 1 of the notes to the accompanying financial statements,
include those related to (1) principles of consolidation, (2) revenue
recognition and (3) research and development. With respect to these critical
accounting policies, our management believes that the application of judgments
and assessments is consistently applied and produces financial information,
which fairly depicts the results of operations for all periods presented.
FACTORS AFFECTING OUR BUSINESS AND PROSPECTS
There are many factors that affect our business and the results of our
operations, some of which are beyond our control. These factors include:
o Our history of operating losses and the likelihood of future
losses.
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 Failure of corporate partners to develop or commercialize
successfully our products or to retain and expand markets served
by the commercial collaborations; conflicts of interest,
priorities, and commercial strategies that may arise between such
corporate partners and us.
o Our limited experience in the sale and marketing of our products.
o Competitive or market factors that may limit the use or broad
acceptance of our products.
o Cancellation or termination of material collaborative agreements
and the resulting loss of research or other funding, or marketing,
sales and distribution capabilities.
o Exchange rate fluctuations that may adversely impact net income
(loss).
o The ability to obtain, maintain and protect intellectual property
rights, and the cost of acquiring in-process technology and other
intellectual property rights, either by license, collaboration or
purchase of another entity.
o Limited experience in manufacturing products on a commercial
scale, failure to manufacture present and future products in
compliance with applicable regulations and at an acceptable cost.
o Dependence on one contract manufacturer involved in the production
of our Eligard products.
o Product liability or other claims against us, which may result in
substantial damages or reduce demand for our products.
o The ability to attract and retain highly qualified management,
administrative and scientific personnel.
16
For a discussion of these and other factors affecting our business and
prospects, see "Item 1.--Business--Factors Affecting our Business and Prospects"
in our Annual Report on Form 10-K for the year ended December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES CONCERNING MARKET RISKS.
We own financial instruments that are sensitive to market risks as part
of our investment portfolio of cash equivalents and marketable securities. The
investment portfolio is used to preserve our capital until it is required to
fund operations, including our research and development activities. None of
these market-risk sensitive instruments are held for trading purposes and we do
not own derivative financial instruments. Our investment portfolio contains
instruments that are primarily subject to interest rate risk.
Interest Rate Risk. Our investment portfolio includes fixed rate debt
instruments that are primarily United States government and agency bonds and
corporate notes with maturity dates ranging from one to fifteen years. To
mitigate the impact of fluctuations in cash flow, we maintain the majority of
our debt instruments as fixed rate. The market value of these bonds is subject
to interest rate risk and could decline in value if interest rates increase. The
portion maintained as fixed rate is dependent on many factors including
judgments as to future trends in interest rates.
Our investment portfolio also includes mutual funds that invest in
United States government and agency bonds, corporate bonds, mortgage-backed and
asset-backed securities, and possibly foreign securities. The value of these
mutual fund investments is also subject to interest rate risk, as well as
maturity risks on mortgage-backed securities and possibly foreign market risks.
We regularly assess the above described market risks and have
established policies and business practices to protect against the adverse
effects of these and other potential exposures. Our investment policy restricts
investments to U.S. government or government-backed securities or to high-rated
commercial paper and other high-rated investments only. As a result, we do not
anticipate any material credit losses in these investments, however, losses may
still occur due to market, political and economic conditions.
For disclosure purposes, we use sensitivity analysis to determine the
impacts that market risk exposures may have on the fair values of our debt and
financial instruments. The financial instruments included in the sensitivity
analysis consist of all of our cash and cash equivalents and short-term and
long-term debt instruments.
To perform a sensitivity analysis, we assess the fair values loss risk
from the impact of hypothetical interest rate changes on market sensitive
instruments. The fair values are computed based on the present value of future
cash flows as impacted by the changes in the rates attributable to the market
risk being measured. The discount rates used for the present value computations
were selected based on market interest rates in effect at March 31, 2003. The
fair values that result from these computations are compared with the fair
values of these financial instruments at March 31, 2003. The differences in this
comparison are the hypothetical gains or losses associated with each type of
risk. The results of the sensitivity analysis at March 31, 2003 are as follows:
Interest Rate Sensitivity: A 10% decrease in the levels of interest
rates with all other variables held constant would result in an
increase in the fair value of our financial instruments by
approximately $0.3 million per year. A 10% increase in the levels of
interest rates with all other variables held constant would result in a
decrease in the fair value of our financial instruments by
approximately $0.3 million per year. We maintain a portion of our
financial instruments, including long-term debt instruments of
approximately $29.2 million at March 31, 2003, at variable interest
rates. If interest rates were to increase or decrease 10%, the impact
of such instruments on cash flows or earnings would not be material.
The use of a 10% estimate is strictly for estimation and evaluation
purposes only. The value of our assets may rise or fall by a greater amount
depending on actual general market performances and the value of individual
securities we own.
Exchange Rate Risk. We face foreign exchange rate fluctuations,
primarily with respect to the British Pound and the Euro, as the financial
results of our foreign subsidiaries are translated into United States dollars
for consolidation. As exchange rates vary, these results when translated may
vary from expectations and adversely
17
impact net income (loss) and overall profitability. The effect of foreign
exchange rate fluctuation for the period ended March 31, 2003 was not material.
Based on our overall foreign currency rate exposure at March 31, 2003, we do not
believe that a hypothetical 10% change in foreign currency rates would
materially affect our financial position.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the filing of this report, we carried out
an evaluation, under the supervision and with the participation of our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Our disclosure
controls and procedures are designed with the objective of ensuring that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Based on this evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC reports. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
There have been no significant changes in our internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date of this evaluation.
18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Description
----------- -----------
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K. None.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ATRIX LABORATORIES, INC.
(Registrant)
April 30, 2003 By: /s/ David R. Bethune
-------------------------------------------
David R. Bethune
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
April 30, 2003 By: /s/ Brian G. Richmond
-------------------------------------------
Brian G. Richmond
Chief Financial Officer, Secretary and
Treasurer (Principal Financial and Chief
Accounting Officer)
20
CERTIFICATIONS
I, David R. Bethune, Chairman and Chief Executive Officer of Atrix Laboratories,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atrix Laboratories,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 30, 2003
/s/ David R. Bethune
------------------------------------
David R. Bethune
Chairman and Chief Executive Officer
21
I, Brian G. Richmond, Chief Financial Officer of Atrix Laboratories, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atrix Laboratories,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 30, 2003
/s/ Brian G. Richmond
----------------------------------
Brian G. Richmond
Chief Financial Officer
22
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer