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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, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of April
24, 2001 was 15,084,589.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, 2001 December 31, 2000
-------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 29,601,060 $ 4,484,330
Marketable securities available for sale, at fair market value 23,670,661 28,910,439
Notes receivable - stock subscription and license fee -- 23,000,000
Accounts receivable, net of allowance for doubtful accounts
of $208,717 and $209,659 2,720,927 2,610,683
Interest receivable 155,901 472,201
Inventories 2,401,751 1,940,929
Prepaid expenses and deposits 1,104,807 1,085,070
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Total current assets 59,655,107 62,503,652
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PROPERTY, PLANT AND EQUIPMENT, NET 7,195,829 6,818,372
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OTHER ASSETS:
Intangible assets, net of accumulated amortization of $2,652,242 and $2,399,431 3,896,008 4,049,104
Deferred finance costs, net of accumulated amortization of $192,063 and $628,379 207,827 800,536
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Other assets, net 4,103,835 4,849,640
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TOTAL ASSETS $ 70,954,771 $ 74,171,664
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 2,690,797 $ 2,197,980
Interest payable 235,025 215,156
Accrued salaries and payroll taxes 284,039 278,684
Other accrued liabilities 91,990 265,873
Deferred revenue 3,845,333 2,997,154
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Total current liabilities 7,147,184 5,954,847
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DEFERRED REVENUE 24,453,940 24,217,699
CONVERTIBLE SUBORDINATED NOTES PAYABLE 10,128,000 36,190,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized
Series A preferred stock, $.001 par value, 200,000 shares authorized and
no shares issued or outstanding -- --
Series A convertible exchangeable preferred stock, $.001 par value, 20,000 shares
Authorized; 12,439 shares issued and outstanding. Liquidation preference
$12,610,741 and $12,397,505 12 12
Common stock, $.001 par value; 25,000,000 shares authorized; 14,849,235 and
13,341,681 shares issued and outstanding 14,849 13,342
Additional paid-in capital 142,673,468 113,763,660
Accumulated other comprehensive loss (150,930) (471,306)
Accumulated deficit (113,311,752) (105,496,590)
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Total shareholders' equity 29,225,647 7,809,118
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 70,954,771 $ 74,171,664
============= =============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
2001 2000
(RESTATED)
------------ ------------
REVENUE:
Net sales and royalties $ 1,233,908 $ 1,157,401
Contract research and development revenue 1,304,280 537,872
Licensing, marketing rights and milestone revenue 717,272 468,444
------------ ------------
Total revenue 3,255,460 2,163,717
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OPERATING EXPENSES:
Cost of goods sold 436,092 459,261
Research and development 6,764,562 3,726,514
Administrative and marketing 1,268,898 1,020,896
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Total operating expense 8,469,552 5,206,671
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LOSS FROM OPERATIONS (5,214,092) (3,042,954)
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OTHER INCOME (EXPENSE):
Equity in loss of joint venture (500,644) --
Investment income 749,044 514,287
Interest expense (314,743) (649,857)
Debt conversion expense (2,039,163) --
Other (696) 38,722
------------ ------------
Net other expense (2,106,202) (96,848)
LOSS BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (7,320,294) (3,139,802)
Extraordinary loss on extinguished debt (281,632) --
Cumulative effect of change in accounting principle -- (20,611,526)
------------ ------------
NET LOSS BEFORE PREFERRED STOCK DIVIDEND (7,601,926) (23,751,328)
Accretion of dividend on preferred stock (213,236) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (7,815,162) $(23,751,328)
============ ============
Basic and diluted earnings per common share:
Loss before extraordinary item and cumulative effect of
change in accounting principle $ (.52) $ (.28)
Extraordinary item (.02) --
Cumulative effect of change in accounting principle -- (1.80)
------------ ------------
Net loss before preferred stock dividend (.54) (2.08)
Accretion of dividend on preferred stock (.01) --
------------ ------------
Net loss applicable to common stock $ (.55) $ (2.08)
============ ============
Basic and diluted weighted average common shares
outstanding 14,178,105 11,439,792
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(Unaudited)
Accumulated
Additional Other Total
Preferred Stock Common Stock Paid-in Comprehensive Accumulated Shareholders'
Shares Amount Shares Amount Capital Loss Deficit Equity
------ ------ ---------- -------- ------------- ------------- ------------- ------------
BALANCE, DECEMBER 31, 2000 12,015 $ 12 13,341,681 $ 13,342 $ 113,763,660 $ (471,306) $(105,496,590) $ 7,809,118
Comprehensive loss:
Net loss -- -- -- -- -- -- (7,815,162) (7,815,162)
Other comprehensive loss:
- Cumulative foreign
currency translation
adjustments -- -- -- -- -- (22,329) -- (22,329)
- Unrealized gain on
investments -- -- -- -- -- 342,705 -- 342,705
------------
Net comprehensive loss (7,494,786)
Issuance of Series A
Convertible Exchangeable
Preferred stock to Elan
for accrued dividends 424 -- -- -- -- -- -- --
Accretion on preferred stock -- -- -- -- 213,236 -- -- 213,236
Issuance of common stock
to extinguish debt -- -- 1,459,672 1,460 28,099,703 -- -- 28,101,163
Non-qualified stock compensation -- -- -- -- 116,524 -- -- 116,524
Exercise of stock options -- -- 46,758 46 464,450 -- -- 464,496
Issuance for employee stock
purchase plan -- -- 1,124 1 15,895 -- -- 15,896
------ ----- ---------- -------- ------------- ---------- ------------- ------------
BALANCE, MARCH 31, 2001 12,439 $ 12 14,849,235 $ 14,849 $ 142,673,468 $ (150,930) $(113,311,752) $ 29,225,647
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See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
2001 2000
(RESTATED)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common stock $ (7,815,162) $(23,751,328)
Adjustments to reconcile net loss to net cash provided by (used in)
Operating activities:
Accretion of dividend on preferred stock 213,236 --
Depreciation and amortization 575,166 561,018
Equity in loss of joint venture 500,644 --
Loss on sale of property, plant and equipment 699 4,667
Loss on sale of marketable securities -- 39,288
Provision for bad debts (942) --
Stock compensation 116,524 75,620
Debt conversion expense 2,039,163 --
Extraordinary loss on extinguished of debt 281,632 --
Cumulative effect of change in accounting principle -- 20,611,526
Net changes in operating assets and liabilities:
Accounts receivable (151,601) (510,635)
Note receivable - license fee 8,000,000 --
Interest receivable 316,300 252,589
Inventories (477,498) (318,253)
Prepaid expenses and deposits (20,042) (73,554)
Accounts payable 174,938 (701,900)
Interest payable 314,737 640,317
Accrued salaries and payroll taxes 6,260 (6,652)
Other accrued liabilities (171,334) (5,350)
Deferred revenue 1,084,421 (515,944)
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Net cash provided by (used in) operating activities 4,987,141 (3,698,591)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (684,868) (147,188)
Investments in intangible assets (99,716) (81,381)
Proceeds from sale of property, plant and equipment -- 25
Proceeds from sale of marketable securities -- 4,764,840
Proceeds from maturity of marketable securities 12,741,621 --
Investment in marketable securities (7,160,404) (98,372)
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Net cash provided by investing activities 4,796,633 4,437,924
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 480,393 262,943
Note receivable - stock subscription 15,000,000 --
------------ ------------
Net cash provided by financing activities 15,480,393 262,943
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NET EFFECT OF EXCHANGE RATE ON CASH (147,437) (2,818)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 25,116,730 999,458
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,484,330 3,021,869
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 29,601,060 $ 4,021,327
============ ============
Supplemental cash flow information:
Cash paid for interest $ -- $ 4,138
============ ============
Non-cash activities:
During the quarter ended March 31, 2001, the Company issued common stock valued
at $28,101,163 to extinguish $26,062,000 of the convertible subordinated
notes.
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Atrix
Laboratories, Inc. and subsidiaries have been prepared in accordance with
generally accepted accounting principles for interim consolidated financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments considered necessary (which
consist of normal recurring accruals and intercompany elimination entries) for a
fair presentation have been included. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2000, filed with the
Securities and Exchange Commission in the Company's Annual Report on Form 10-K.
Atrix Laboratories, Inc. was formed in August 1986 as a Delaware
corporation. In November 1998, the Company acquired ViroTex. 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. Collectively, Atrix Laboratories and its
subsidiaries are referred to as Atrix or the Company. In June 2000, the Company
entered into a research joint venture, Transmucosal Technologies, Limited, with
Elan International Services, Ltd., a wholly owned subsidiary of Elan
Corporation, plc to develop oncology and pain management compounds. Drug
delivery of these compounds will utilize our patented ATRIGEL and BEMA drug
delivery systems and Elan's nonoparticulate delivery technology.
The Company 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, pain management, growth hormone releasing peptide-1 and
dermatology products. The Company also partners with several large
pharmaceutical and biotechnology companies to apply its proprietary technologies
to new chemical entities or to extend the patent life of existing products. The
Company has strategic alliances with several large pharmaceutical companies to
use its drug delivery technologies and expertise in the development of new
products.
Effective in the fiscal fourth quarter of 2000, the Company changed its
method of accounting for nonrefundable technology access fees and milestone
payments to recognize such payments as revenue over the term of the related
agreements. The change in accounting principle is based on guidance provided in
the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 -
Revenue Recognition in Financial Statements. Previously, the Company recognized
$24,100,000 for nonrefundable technology access fees and milestone payments as
revenue when received and when the Company fulfilled all contractual obligations
relating to the fees and milestone payments. There was an approximately
$20,612,000 cumulative effect for this change in accounting principle that was
reported as a charge in the year ended December 31, 2000. The cumulative effect
was recorded as deferred revenue that will be recognized as revenue over the
remaining contractual terms for each of the specific agreements.
The following represents the Consolidated Statement of Operations
represents the three months ended March 31, 2000 as previously reported, the
adjustments for the adoption of SAB No. 101, and the resulting Consolidated
Statement of Operations as restated for that adoption.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2000 RESTATED
(Unaudited)
2000
(AS PREVIOUSLY SAB No. 101 2000
REPORTED) ADJUSTMENTS (RESTATED)
-------------- ------------ ------------
REVENUE:
Net sales and royalties $ 1,157,401 $ -- $ 1,157,401
Contract research and development revenue 537,872 -- 537,872
Licensing, marketing rights and milestone revenue 65,000 403,444 468,444
------------ ------------ ------------
Total revenue 1,760,273 403,444 2,163,717
------------ ------------ ------------
OPERATING EXPENSES:
Cost of goods sold 459,261 -- 459,261
Research and development 3,726,514 -- 3,726,514
Administrative and marketing 1,020,896 -- 1,020,896
------------ ------------ ------------
Total operating expenses 5,206,671 -- 5,206,671
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (3,446,398) 403,444 (3,042,954)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Investment income 514,287 -- 514,287
Interest expense (649,857) -- (649,857)
Other 38,722 -- 38,722
------------ ------------ ------------
Net other expense (96,848) -- (96,848)
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (3,543,246) 403,444 (3,139,802)
Cumulative effect of change in accounting principle -- (20,611,526) (20,611,526)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (3,543,246) $(20,208,082) $(23,751,328)
============ ============ ============
Basic and diluted earnings per common share:
Income (loss) before cumulative effect of change in
accounting principle $ (.31) $ (.28)
Cumulative effect of change in accounting principle -- $ (1.80)
------------ ------------
Net loss applicable to common stock $ (.31) $ (2.08)
============ ============
Basic and diluted weighted average common shares
outstanding 11,439,792 11,439,792
============ ============
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NOTE 2. 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 Bulletin 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." Accordingly, the Company accounts for its investment
in Transmucosal Technologies under the equity method of accounting.
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. The inventory components at March 31, 2001
and December 31, 2000, are as follows:
March 31, 2001 December 31, 2000
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Raw materials $1,998,293 $1,616,878
Work in process 202,746 144,723
Finished goods 200,712 179,328
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$2,401,751 $1,940,929
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NOTE 4. PROPERTY, PLANT, AND EQUIPMENT
The components of net property, plant and equipment are as follows:
MARCH 31, 2001 DECEMBER 31, 2000
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Land $ 1,071,018 $ 1,071,018
Building 3,612,613 3,610,068
Leasehold improvements 507,002 470,002
Furniture and fixtures 471,538 440,534
Machinery 5,440,949 5,038,815
Office equipment 1,020,760 813,317
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Total property, plant and equipment 12,123,880 11,443,754
Accumulated depreciation and
amortization (4,928,051) (4,625,382)
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Property, plant and equipment, net $ 7,195,829 $ 6,818,372
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NOTE 5. 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. The effect of assuming conversion of the Series A
convertible preferred stock is excluded from the diluted earnings per share
computations since the conversion option commences July 18, 2002. Additionally,
since the Company has not drawn any proceeds under the convertible promissory
note agreement with Elan as of March 31, 2001, there was no effect on earnings
per share computations pertaining to this convertible promissory note for the
periods presented. Common share equivalents have been excluded from the
computations in loss periods, as their effect would be antidilutive. The effect
of assuming conversion of the Series A convertible exchangeable convertible
preferred stock is excluded from the diluted earnings per share computations
since the conversion option commences July 18, 2002. Additionally since the
Company did not draw any proceeds under the convertible promissory note
agreement with Elan as of March 31, 2001, there was no effect on earnings per
share computations pertaining to this convertible promissory note for the
periods presented. For the quarters ended March 31, 2001 and 2000, approximately
1.8 million and 2.0 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.
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NOTE 6. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In January and February 2001, the Company completed a series of private
transactions involving the exchange of 1,459,672 newly issued common shares for
$26,062,000, or 52% of the original offering amount, of the 7% convertible
subordinated notes. Of the 1,459,672 shares issued, 1,371,684 shares were valued
at the conversion price of $19.00 per share and the remaining 87,988 were valued
at the closing market price as of the various exchange dates. As a result, the
Company recognized an extraordinary loss of approximately $282,000, for the
write-off of approximately $577,000 for pro rata unamortized deferred finance
charges net of approximately $295,000 interest expense eliminated as a result of
these exchanges. Additionally, as part of the 87,988 shares issued to induce
conversion, debt conversion expense of approximately $2,039,000 was recognized
in the quarter ended March 31, 2001. As of March 31, 2001 and December 31, 2000,
the convertible notes payable balance was $10,128,000 and $36,190,000,
respectively.
NOTE 7. PENDING LEGAL ACTION
Disputes exist with Block Drug Company, a wholly owned subsidiary of
GlaxoSmithKline, concerning product pricing and the payments due upon
achievement of milestones. With respect to product pricing, arbitration began in
December 2000 to resolve the issue as to the minimum price Block must pay for
products under the agreement. An arbitration hearing was set for July 25, 2001.
On April 20, 2001, the Company and Block Drug reached a settlement agreement
resolving the pricing dispute over Block Drug's sale of ATRIDOX. The settlement
agreement provides for the payment owed to the Company for sales of the product
in 1999. The parties also implemented a new pricing schedule for future
purchases.
With respect to milestone payments, the Company believes that, under the
agreement, the milestone for the FDA approval of the ATRISORB-DOXY Barrier
product was achieved in 2000 and the corresponding payment of $1,000,000 was
due. Block has not made this payment. Pursuant to the agreement with Block, the
Company will be entitled to an additional milestone payment of $2,000,000 upon
Block's first commercial sale of the ATRISORB-DOXY Barrier product in the United
States. The Block agreement provides that the first commercial sale of this
product in the U.S. must occur within 120 days after FDA approval, subject to
certain conditions that have been satisfied. The Company has notified Block that
they are in breach of the agreement for failure to commence marketing of the
ATRISORB-DOXY Barrier product. The FDA approved the ATRISORB-DOXY Barrier
product in September 2000. An arbitrator has been selected with respect to this
dispute, but no schedule or hearing has been set. The Company intends to
vigorously pursue its rights to these milestone payments.
NOTE 8. SUBSEQUENT EVENTS
In April 2001, the Company entered into an exclusive European marketing
agreement with MediGene AG for the Leuprogel products. In the agreement, valued
at approximately $20 million, the Company received an up-front license fee
payment of $2 million in April 2001 and will receive additional payments for
certain clinical, regulatory and sales milestones. Additionally, MediGene
purchased shares of the Company's common stock for $4 million in April 2001 at a
premium to the market as part of the agreement, and will provide all resources
needed to conduct clinical research and regulatory activities associated with
seeking European marketing approvals.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion relates to the restated interim amounts for the
quarter ended March 31, 2000, a result of the change in accounting principle for
the recognition of revenue as discussed in Note 1 to the Consolidated Financial
Statements of this report. 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: (i) whether we
will receive, and the timing of, regulatory approvals or clearances to market
potential products; (ii) the results of current and future clinical trials;
(iii) the time and expenses associated with the regulatory approval process for
products; (iv) the safety and effectiveness of our products and technologies;
(v) the timing of new product launches; and (vi) expected future additional
equity losses for Transmucosal Technologies. The success of our business
operations is in turn dependent on factors such as the receipt and timing of
regulatory approvals or clearances for potential products, the effectiveness of
our marketing strategies to market, our current and any future products, our
ability to manufacture products on a commercial scale, the appeal of our mix of
products, our success at entering into and collaborating with others to conduct
effective strategic alliances and joint ventures, general competitive conditions
within the biotechnology and drug delivery industry and general economic
conditions. Forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. Actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors, including those described below under the heading "Risk Factors."
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, pain management, and dermatology products. 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: safe and effective, wide array and ease of applications,
site-specific or systemic delivery, customized release rates and
biodegradability. With the acquisition of ViroTex in November 1998, we added
four additional drug delivery systems: BEMA, MCA, BCP and SMP.
We also partner with large pharmaceutical and biotechnology companies to
apply our proprietary technologies to new chemical entities or to extend the
patent life of existing products. We have strategic alliances with several
pharmaceutical companies including collaborations with Pfizer, Elan,
Sanofi-Synthelabo, MediGene, Geneva Pharmaceuticals, Del Pharmaceuticals,
Pharmacia & Upjohn Animal Health, Block Drug Company/GlaxoSmithKline, and J.B.
Williams Company.
In April 2001, we entered into an exclusive European marketing agreement
with MediGene AG, a Germany based biotechnology company, for the Leuprogel
products. In the agreement, valued at approximately $20 million, we received an
up-front license fee payment of $2 million in April 2001 and will receive
additional payments for certain clinical, regulatory and sales milestones. The
$2 million license fee from MediGene will be recognized as revenue over a
ten-year period using the straight-line method in accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements. Additionally, MediGene purchased shares of
our common stock for $4 million at a premium to the market in April 2001 as part
of the agreement, and will provide all resources needed to conduct clinical
research and regulatory activities associated with seeking European marketing
approvals.
In January 2001, we received an exclusive option from Tulane University
Health Science Center to license human growth releasing peptide-1, or GHRP-1, a
novel patented growth-promoting compound. Previously we focused on reformulating
existing compounds in our drug delivery technologies. The GHRP-1 represents our
first chemical entity that we would acquire and develop for our own product
portfolio, rather than in conjunction with an external partner. Possible
applications of GHRP-1 include treatment of patients with AIDS or cancer,
promotion of growth in children with short stature, or prevention of muscle
wasting and frailty in aged individuals. We intend to deliver GHRP-1 for an
extended period of time using our patented ATRIGEL drug delivery system.
We continued to devote significant resources during the three months ended
2001 for the research and development of our Leuprogel prostate cancer treatment
products and Atrisone acne treatment product, as well as, our new GHRP-1
product. We anticipate the commitment of significant resources for research and
development activities will continue throughout 2001 for the expeditious
advancement of our various products currently in development. Research and
development costs for third-party partnerships, such as Pfizer, Geneva
Pharmaceuticals, and our joint venture with Elan will continue as well.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2000 (RESTATED)
Total revenues for the three months ended March 31, 2001 were approximately
$3,255,000 compared to approximately $2,164,000 for the three months ended March
31, 2000, representing a 50% increase.
Product net sales and royalty revenue were approximately $1,234,000 during
the three months ended March 31, 2001 compared to approximately $1,157,000 for
the three months ended March 31, 2000. This 7% increase was primarily related to
the launch of ATRIDOX international sales by our German subsidiary in the first
quarter of 2001.
Contract research and development revenue represents revenue we received
from grants, 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 approximately $1,304,000 for the three months ended March 31, 2001
compared to
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approximately $538,000 for the three months ended March 31, 2000, representing a
142% increase. This increase is primarily related to revenue recognition of
approximately $625,000 for oncology and pain management research activities with
our joint venture, Transmucosal Technologies, Ltd., which commenced in October
2000 and approximately $215,000 for dermatology research activities with Geneva
Pharmaceuticals, which commenced in August 2000.
Licensing fees, marketing rights and milestone revenue in accordance with
SAB No. 101 for the three months ended March 31, 2001 was approximately $717,000
compared to approximately $468,000 for the three months ended March 31, 2000,
representing a 53% increase. This increase is primarily related to the
recognition of approximately $200,000 in license fee revenue in accordance with
SAB No. 101 for our Leuprogel products under the Sanofi-Synthelabo December 2000
agreement. The Block agreement provides for potential milestone payments
totaling up to $50 million to us over a three-to-five year period, as well as
manufacturing margins and royalties on sales. Prior to 2001, we had received
$24.1 million in milestone payments from Block. In February 2001, we received a
$1,000,000 ATRIDOX sales milestone payment from Block. This sales milestone
payment will be recognized as revenue over a ten-year period using the
straight-line method in accordance with SAB No. 101 - Revenue Recognition in
Financial Statements. We are currently in dispute with Block pertaining to two
ATRISORB-DOXY milestone payments. See Note 7. Pending Legal Action.
Cost of goods sold recorded for the three months ended March 31, 2001 was
approximately $436,000 compared to approximately $459,000 for the three months
ended March 31, 2000, representing a 5% decrease. This decrease in cost of sales
reflects improved margins on our ATRIDOX product.
Research and development expenses for the three months ended March 31, 2001
were approximately $6,765,000 compared to approximately $3,727,000 for the three
months ended March 31, 2000, representing an 82% increase. Approximately
$1,667,000 of this expected increase was due to the rapid progress in our
Leuprogel for prostate cancer treatment products. This included our March 2001
filing of the NDA to the FDA for the Leuprogel One-month product, near
completion of the Leuprogel Three-month product, and completion of patient
enrollment for the Leuprogel Four-month product. In January 2001, we received an
exclusive option from Tulane University Health Science Center to license human
growth releasing peptide-1, or GHRP-1, a novel patented growth-promoting
compound. Research and development activities for the GHRP-1 were approximately
$684,000 for the first quarter 2001. Dermatology research and development
activities for Geneva Pharmaceuticals' related projects increased approximately
$425,000 for the first quarter of 2001. Additionally, Atrisone research and
development expenditures increased approximately $222,000 for the three months
ending March 31, 2001. Atrisone Phase III patient enrollment commenced in April
2001.
Administrative and marketing expenses for the three months ended March 31,
2001 were approximately $1,269,000 compared to approximately $1,021,000 for the
three months ended March 31, 2000, representing a 24% increase. The increase was
primarily related to the recognition of compensation expense for the issuance of
non-qualified stock options and an increase in legal fees associated with the
Block arbitration. See Note 7. Pending Legal Action.
We recognized a loss of approximately $501,000 for the three months ended
March 31, 2001 for our 80.1% equity share in the loss of Transmucosal
Technologies, our joint venture with Elan. We expect to record additional equity
losses for Transmucosal Technologies in the foreseeable future.
Investment income for the three months ended March 31, 2001 was
approximately $749,000 compared to approximately $514,000 for the three months
ended March 31, 2000, representing a 46% increase. The increase was primarily
the result of a net increase in our cash and cash equivalents and our marketable
securities of approximately $19,134,000 for the first quarter of 2001 in
comparison to the first quarter 2000 cash and investment balances. The increase
in our cash and investment balances was primarily the result of receiving an $8
million license fee and a $15 million purchase of our common stock from
Sanofi-Synthelabo in January 2001 in conjunction with the December 2000
agreement.
Interest expense for the three months ended March 31, 2001 was
approximately $315,000 compared to approximately $650,000 for the three months
ended March 31, 2000, representing a 52% decrease. The reduction in interest
expense was primarily the result of our repurchase and retirement of $26,562,000
of our 7% convertible subordinated notes since the period ended March 31, 2000.
In January and February 2001, we completed a series of private transactions
involving the exchange of 1,459,672 newly issued common shares for $26,062,000,
or 52% of the original offering amount, of the 7% convertible subordinated
notes. Of the 1,459,672 shares issued, 1,371,684 shares were valued at the
conversion price of $19.00 per share and the remaining 87,988 were valued at the
closing market price as of the various exchange dates. As a result, we
recognized an extraordinary loss of approximately $282,000, for the write-off of
approximately $577,000 for pro rata unamortized deferred finance charges net of
approximately $295,000 interest expense eliminated as a result of these
exchanges. Additionally, as part of the 87,988 shares issued to induce
conversion, a debt conversion expense of approximately $2,039,000 was also
recognized in the first quarter ended March 31, 2001. The convertible notes
payable balance was reduced to $10,128,000 as a result of these exchanges.
Effective in the fiscal fourth quarter of 2000, we changed our method of
accounting for nonrefundable technology access fees and milestone payments to
recognize such payments as revenue over the term of the related agreements. The
change in accounting principle is based on guidance provided in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements. Previously, we recognized $24,100,000 for
nonrefundable technology access fees and milestone payments as revenue when
received and when we fulfilled all contractual obligations relating to the fees
and milestone payments. We recorded an approximately $20,612,000 cumulative
effect for this change in accounting principle that was reported as a charge in
the first quarter of 2000.
We issued Series A convertible exchangeable preferred stock to Elan in July
2000 in connection with the formation of our joint venture with Elan. Related to
this issuance, we recognized approximately $213,000 for accretion of dividend on
preferred stock for the three months ended March 31, 2001.
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For the reasons described above, we recorded a net loss applicable to
common stock of approximately $7,815,000, or $.55 per share, for the three
months ended March 31, 2001 compared to a net loss applicable to common stock of
approximately $23,751,000, or $2.08 per share, for the three months ended March
31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, we had cash and cash equivalents of approximately
$29,601,000, marketable securities (at fair market value) of approximately
$23,671,000 and other current assets of approximately $6,383,000 for total
current assets of approximately $59,655,000. Current liabilities totaled
approximately $7,147,000, which resulted in working capital of approximately
$52,508,000.
We have a revolving line of credit with a bank that expires in August 2001.
Under the terms of the line of credit, we may borrow up to $1,000,000.
Borrowings under the line bear interest at the prime rate and are subject to
financial covenants requiring us to maintain certain levels of net worth and
liquidity. As of March 31, 2001, we had no outstanding balance under this line
of credit.
In July 2000, Elan and our company formed Transmucosal Technologies, a
joint venture to develop and commercialize oncology and pain management
products. Subject to the satisfaction of certain conditions, Elan has agreed to
loan us up to $8,010,000 under a 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. The note also allows
us to convert this debt into our common stock at the prevailing market price at
maturity. As of March 31, 2001, we had not drawn any amounts under the note.
During the three months ended March 31, 2001, net cash provided by
operating activities was approximately $4,987,000. This was primarily the result
of the net loss for the period of approximately $7,815,000, adjusted for certain
non-cash expenses, and changes in operating assets and liabilities as set forth
in the consolidated statements of cash flows. We received an $8,000,000 license
fee from Sanofi-Synthelabo in January 2001 for payment of the December 2000 Note
Receivable - License Fee. Additionally, we recognized a non-cash charge for debt
conversion expense of $2,039,000 during the three months ended March 31, 2001
for the exchange of 1,459,672 shares of our common stock to extinguish
approximately $26,062,000 our convertible subordinated notes.
Net cash provided by investing activities was approximately $4,797,000
during the three months ended March 31, 2001, primarily as a result of proceeds
of approximately $12,742,000 for three called bond investments. This was offset
by approximately $7,160,000 for the purchase of three bond investments.
Net cash provided by financing activities was approximately $15,480,000
during the three months ended March 31, 2001. We received $15,000,000 from
Sanofi-Synthelabo in January 2001 for payment pertaining to Sanofi's common
stock purchase in conjunction with the December 2000 collaboration, license and
supply agreement. Additionally, approximately $480,000 was for the issuance of
our common stock related to employee stock options and the employee stock
purchase plan.
Our long-term capital expenditure requirements will depend on numerous
factors, including:
o the progress of our research and development programs,
o the time required to file and process regulatory approval
applications,
o the development of our commercial manufacturing facilities,
o our ability to obtain additional licensing arrangements, and
o the demand for our products.
We expect to continue to incur substantial expenditures for research and
development, testing, regulatory compliance, market development in European
countries, possible repurchases of our notes or common stock and to hire
additional management, scientific, manufacturing and administrative personnel.
We will also continue to expend a significant amount of funds in our ongoing
clinical studies. Depending on the results of our research and development
activities, we may determine to accelerate or expand our efforts in one or more
proposed areas and may, therefore, require additional funds earlier than
previously anticipated. Management believes that the existing cash and cash
equivalent assets in addition to marketable security resources will be
sufficient to fund our operations through 2001. However, we cannot assure you
that underlying assumed levels of revenue and expense will prove accurate.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective in the fiscal fourth quarter of 2000, we changed our method of
accounting for nonrefundable technology access fees and milestone payments to
recognize such payments as revenue over the term of the related agreements. The
change in accounting principle is based on guidance provided in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements. Previously, we recognized $24,100,000 for
nonrefundable technology access fees and milestone payments as revenue when
received and when we fulfilled all contractual obligations relating to the fees
and milestone payments. We recorded an approximately $20,612,000 cumulative
effect for this change in accounting principle that was reported as a charge in
the year ended December 31, 2000. The cumulative effect was recorded as deferred
revenue that will be recognized as revenue over the remaining contractual terms
for each of the specific agreements. During the year ended December 31, 2000,
the impact of the change in accounting principle increased net loss applicable
to common stock by approximately $18,734,000, or $1.58 per share. This amount is
comprised of approximately $20,612,000, or $1.73 per share, cumulative effect of
the change as described above, net of approximately $1,878,000, or $0.16 per
share, recognized as revenue during the year. The remainder of the related
deferred revenue will be recognized as revenue approximately as follows:
$1,885,000 for each year from 2001 through 2010 and $11,000 for each year from
2011 through 2015 and $2,000 in 2016.
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In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued which, as amended, was effective for all fiscal
years beginning after June 15, 1999. SFAS No. 133 provides new standards for the
identification, recognition and measurement of derivative financial instruments,
including embedded derivatives. Historically, we have not entered into
derivative contracts to hedge existing risks nor have we entered into
speculative derivative contracts. Although our convertible debt and preferred
stock include conversion features that are considered to be embedded
derivatives, accounting for those instruments is not affected by SFAS No. 133.
The adoption of SFAS No. 133 on January 1, 2001 did not result in a transition
adjustment in the financial statements.
RISK FACTORS
In addition to the other information contained in this Report, we caution
stockholders and potential investors that the following important factors, among
others, in some cases have affected, and in the future could affect, our actual
results of operations and could cause our actual results to differ materially
from those expressed in any forward-looking statements made by or on behalf of
our company. The following information is not intended to limit in any way the
characterization of other statements or information under other captions as
cautionary statements for such purpose. These factors include:
o Delay, difficulty, or failure in obtaining regulatory approval or
clearance to market additional products, including delays or
difficulties in development because of insufficient proof of safety or
efficacy.
o Substantial manufacturing and marketing expenses to be incurred in the
commercial launch of the ATRIDOX and ATRISORB products and
commercializing future products.
o Failure of corporate partners to develop or commercialize successfully
our products or to retain and expand markets served by the commercial
collaborations; conflicts of interest, priorities, and commercial
strategies that may arise between our company and such corporate
partners.
o Our limited experience in the sale and marketing of our products;
dependence on Block to establish effective marketing, sales and
distribution capabilities for the ATRIDOX, ATRISORB GTR Barrier, and
ATRISORB-DOXY products in North America. Failure to internally develop
marketing channels for the ATRISORB GTR Barrier, ATRISORB-DOXY and
ATRIDOX products in Europe.
o Outcome of our disputes with Block, fees and expenses associated
therewith and impact upon Block's marketing, sales and distribution of
our products.
o The ability to obtain, maintain and protect intellectual property
rights, and the cost of acquiring in-process technology and other
intellectual property rights, either by license, collaboration or
purchase of another entity.
o Limited experience in manufacturing products on a commercial scale,
failure to manufacture present and future products in compliance with
applicable regulations and at an acceptable cost.
o Product liability or other claims against us which may result in
substantial damages or reduce demand for our products.
o Cancellation or termination of material collaborative agreements
(including the Block agreement) and the resulting loss of research or
other funding, or marketing, sales and distribution capabilities.
o Access to the pharmaceutical compounds necessary to successfully
commercialize the ATRIGEL system, ATRIDOX and ATRISORB products or
other products and delivery systems currently in development.
o Competitive or market factors that may limit the use or broad
acceptance of our products.
o The ability to attract and retain highly qualified management and
scientific personnel.
o Difficulties or high costs of obtaining adequate financing to fund
future research, development and commercialization of products.
o The slow rate of acceptance of new products.
o The continued growth and market acceptance of our products and our
ability to develop and commercialize new products in a timely and
cost-effective manner.
o Exchange rate fluctuations that may adversely impact net income
(loss).
o Our ability to enter into strategic alliances or collaborative
arrangements with third parties to market and commercialize our
products on favorable terms, if at all.
o The requirement that we must receive separate regulatory approval for
each of our product candidates in each indication before we can sell
them in North America or internationally.
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o Our ability to successfully acquire and integrating technologies and
businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES CONCERNING MARKET RISKS.
We own financial instruments that are sensitive to market risks as part of
our investment portfolio of cash equivalents and marketable securities. The
investment portfolio is used to preserve our capital until it is required to
fund operations, including our research and development activities. None of
these market-risk sensitive instruments are held for trading purposes. We do not
own derivative financial instruments in our investment portfolio. Due to the
nature of our investment portfolio, the investment portfolio contains
instruments that are primarily subject to interest rate risk. Our convertible
subordinated notes are also subject to interest rate and equity price risks.
Interest Rate Risk. Our investment portfolio includes fixed rate debt
instruments that are primarily United States government and agency bonds with
maturity dates ranging from one to nine years. To mitigate the impact of
fluctuations in cash flow, we maintain substantially all 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 equity interests in United States
government and agency bond funds. The value of these equity interests is also
subject to interest rate risk.
We regularly assess the above described market risks and have established
policies and business practices to protect against the adverse effects of these
and other potential exposures. Our investment policy restricts investments to
U.S. Government or government backed securities, or the highest rated commercial
paper (A1P1) only. As a result, we do not anticipate any material losses in
these areas.
For disclosure purposes, we use sensitivity analysis to determine the
impacts that market risk exposures may have on the fair values of our debt and
financial instruments. The financial instruments included in the sensitivity
analysis consist of all of our cash and cash equivalents and long-term and
short-term debt instruments.
To perform a sensitivity analysis, we assess the risk of loss in fair
values from the impact of hypothetical changes in interest rates on market
sensitive instruments. The fair values are computed based on the present value
of future cash flows as impacted by the changes in the rates attributable to the
market risk being measured. The discount rates used for the present value
computations were selected based on market interest rates in effect at March 31,
2001. The fair values that result from these computations are compared with the
fair values of these financial instruments at March 31, 2001. 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, 2001 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 $286,000 per year.
A 10% increase in the levels of interest rates with all other variables
held constant would result in a decrease in the fair value of our financial
instruments by approximately $286,000 per year. We maintain a portion of
our financial instruments, including long-term debt instruments of
approximately $7,813,000 at March 31, 2001, at variable interest rates. If
interest rates were to increase or decrease 10%, the impact of such
instruments on cash flows or earnings would not be material.
The use of a 10% estimate is strictly for estimation and evaluation
purposes only. The value of our assets may rise or fall by a greater amount
depending on actual general market performances and the value of individual
securities we own.
The market price of our 7% convertible subordinated notes generally changes
in parallel with the market price of our common stock. When our stock price
increases, the price of these notes generally increases proportionally. Fair
market price of the notes can be determined from quoted market prices, where
available. The fair value of our long-term debt was estimated to be
approximately $8,482,000 at March 31, 2001 and is lower than the carrying value
by approximately $1,646,000. Market risk was estimated as the potential decrease
in fair value resulting from a hypothetical 1% increase in our weighted average
long-term borrowing rate and a 1% decrease in quoted market prices, or
approximately $203,000.
Exchange Rate Risk. We face foreign exchange rate fluctuations, primarily
with respect to the British Pound and the Euro, as the financial results of our
foreign subsidiaries are translated into United States dollars for
consolidation. As exchange rates vary, these results, when translated may vary
from expectations and adversely impact net income (loss) and overall
profitability. The effect of foreign exchange rate fluctuation for the period
ended March 31, 2001 was not material. Based on our overall foreign currency
rate exposure at March 31, 2001, we do not believe that a hypothetical 10%
change in foreign currency rates would materially affect our financial position.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
With respect to our product pricing dispute with Block Drug Company,
arbitration began in December 2000 to resolve the issue as to the minimum price
Block must pay for products under the agreement. An arbitration hearing was set
for July 25, 2001. On April 20, 2001, we entered into a settlement agreement
with Block resolving the pricing dispute over Block's sale of our ATRIDOX
product. The settlement agreement provides for the payment owed to us for sales
of the product in 1999. We also implemented a new pricing schedule for future
purchases.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January and February 2001, we completed a series of private transactions
involving the exchange of 1,459,672 newly issued shares of common stock for
$26,062,000, or 52% of the original offering amount, of our 7% convertible
subordinated notes. Of the 1,459,672 shares issued, 1,371,684 shares were valued
at the conversion price of $19.00 per share and the remaining 87,988 were valued
at the closing market price as of the various exchange dates. Because these
transactions constituted an exchange of securities by us exclusively with
existing security holders, where no commission or other remuneration was paid or
given for soliciting such exchange, the transactions were exempt from
registration under the Securities Act of 1933 under Section 3(a)(9) of the
Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K. We filed the following Current Reports on Form
8-K during the quarter ended March 31, 2001:
o Current Report on Form 8-K dated December 29, 2000 filed with the SEC
on January 9, 2001, reporting an agreement with Sanofi-Synthelabo Inc.
granting Sanofi-Synthelabo exclusive North American marketing rights
to our Leuprogel One-, Three-, and Four-month products, and an
investment by Sanofi-Synthelabo in our common stock, under Item 5.
Other Events, and Item 7. Exhibits.
o Current Report on Form 8-K dated December 29, 2000 filed with the SEC
on January 9, 2001 reporting the execution of a collaboration, license
and supply agreement with Sanofi-Synthelabo and an investment by
Sanofi-Synthelabo in our common stock, under Item 5. Other Events, and
Item 7. Exhibits.
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 26, 2001 By: /s/ David R. Bethune
-------------------------------------
David R. Bethune
Chairman of the Board of Directors
and Chief Executive Officer
April 26, 2001 By: /s/ Brian G. Richmond
-------------------------------------
Brian G. Richmond
Chief Financial Officer and Assistant
Secretary
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