<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A-2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
November 24, 1998
---------------------------------
(Date of earliest event reported)
ATRIX LABORATORIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 0-18231 84-1043826
- --------------- --------------------- ----------------------
(State or Other (Commission File No.) (IRS Employer
Jurisdiction of Identification No.)
Incorporation)
2579 Midpoint Drive, Fort Collins, Colorado 80525
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(970) 482-5868
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENT, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of ViroTex Corporation. Please see
Attachment A.
(b) Pro forma financial information. Please see Attachment B.
(c) Exhibits.
23. Consent of PricewaterhouseCoopers LLP.
2
<PAGE> 3
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 hereunto duly authorized, on this 11th day of February, 1999.
ATRIX LABORATORIES, INC.
By: /s/ BRIAN G. RICHMOND
--------------------------------
Brian G. Richmond
Vice President, Finance
and Assistant Secretary
3
<PAGE> 4
Attachment A
<TABLE>
<S> <C>
Report of Independent Accountants A-1
Balance Sheets as of December 31, 1997 and 1996 A-2
Statements of Operations for the Years Ended December 31, 1997
and 1996 and for the period from inception, May 4, 1988,
to December 31, 1997 A-3
Statement of Changes in Stockholders' Equity for the Years
Ended December 31, 1997 and 1996 and for the period from
inception,
May 4, 1988, to December 31, 1997 A-4
Statements of Cash Flows for the Years Ended December 31, 1997
and 1996 and for the period from inception, May 4, 1988,
to December 31, 1997 A-5
Notes to Financial Statements A-6
Balance Sheets as of December 31, 1997 and September 30, 1998
(Unaudited) A-16
Unaudited Statements of Operations for the Nine Months Ended
September 30, 1998 and 1997 and for the period from inception,
May 4, 1988, to September 30, 1998 A-17
Unaudited Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 and for the period from inception,
May 4, 1988, to September 30, 1998 A-18
Unaudited Statement of Changes in Stockholders' Equity for the Nine
Months Ended September 30, 1998 A-19
Notes to Unaudited Financial Statements A-20
</TABLE>
<PAGE> 5
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
ViroTex Corporation:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of ViroTex Corporation at December 31,
1997 and 1996, and the results of its operations and its cash flows for the
years then ended and for the period from inception, May 4, 1988, through
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP.
Houston, Texas
May 4,1998
A-1
<PAGE> 6
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,135,878 $ 1,729,066
Accounts receivable, net of allowance for doubtful accounts
of $0 and $35,494 at December 31, 1997 and 1996,
respectively 70,184 167,200
Prepaid expenses 73,851
Deferred income tax asset 287,000
----------- -----------
Total current assets 4,279,913 2,183,266
Property and equipment, net 494,596 243,394
Deferred income tax asset 439,000
Other assets, net 241,334 783,986
----------- -----------
Total assets $ 5,015,843 $ 3,649,646
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 8,398
Accounts payable $ 117,254 86,179
Accrued liabilities 112,280 167,569
Current federal income tax payable 40,236
----------- -----------
Total current liabilities 269,770 262,146
Long-term debt, net of current maturities 6,856
Other liabilities 25,000 125,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized; 350,000
Series A convertible preferred shares issued and outstanding at December
31, 1997 and 1996 ($175,000 aggregate liquidation preference); 384,616
Series B convertible preferred shares issued and outstanding at December
31, 1997 and 1996 ($500,000 aggregate liquidation preference); 340,000
Series C convertible preferred shares issued and outstanding at December
31, 1997 and 1996 ($510,000 aggregate liquidation preference); 1,000,000
Series D convertible preferred shares issued and outstanding at December
31, 1997 and 1996 ($2,000,000 aggregate liquidation preference); 1,566,668
Series E convertible preferred shares issued and outstanding at December
31, 1997 and 1996 ($2,350,001 aggregate liquidation preference); 1,100,000
Series F convertible preferred shares issued and outstanding at December
31, 1997 and 1996 ($2,200,000 aggregate liquidation
preference) 4,741 4,741
Common stock, $.001 par value, 15,000,000 authorized, 641,704 and
640,176 shares issued and outstanding at December 31, 1997 and
1996, respectively 642 640
Additional paid-in capital 7,779,403 7,779,099
Deficit accumulated during the development stage (3,063,713) (4,528,836)
----------- -----------
Total stockholders' equity 4,721,073 3,255,644
----------- -----------
Total liabilities and stockholders' equity $ 5,015,843 $ 3,649,646
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-2
<PAGE> 7
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
for the years ended December 31, 1997 and 1996 and
for the period from inception, May 4, 1988, to December 31, 1997
<TABLE>
<CAPTION>
INCEPTION,
MAY 4,1988, TO
DECEMBER 31,
1997 1996 1997
<S> <C> <C> <C>
License fees $ 4,575,000 $ 750,000 $ 5,400,000
Royalties 387,605 300,000 687,605
Grant revenues 83,062 16,782 199,764
Net product sales 82,516 180,339
Other 88,283 88,283
----------- ----------- --------------
Total revenues 5,133,950 1,149,298 6,555,991
=========== =========== ==============
General and administrative 878,740 636,666 3,368,762
Research and development 1,367,922 582,694 3,371,238
Sales and marketing 377,419 778,826 2,610,399
Cost related to license fees 414,197 414,197
Cost related to product sales 38,783 76,326
----------- ----------- --------------
3,038,278 2,036,969 9,840,922
----------- ----------- --------------
Net income (loss) from operations 2,095,672 (887,671) (3,284,931)
Interest income and other 136,471 25,322 275,282
Interest expense (784) (5,759) (13,828)
----------- ----------- --------------
Net income (loss) before income taxes 2,231,359 (868,108) (3,023,477)
Current income tax expense (40,236) (40,236)
Deferred income tax (expense) benefit (726,000) 726,000
----------- ----------- --------------
(766,236) 726,000 (40,236)
----------- ----------- --------------
Net income (loss) $ 1,465,123 $ (142,108) $ (3,063,713)
----------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-3
<PAGE> 8
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY for the years ended December 31,
1997 and 1996 and for the period from inception, May 4, 1988, to
December 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK
------------------------------
SHARES AMOUNT
<S> <C> <C>
Issuance of $.001 par value common stock on October 7, 1988, at estimated fair
value ($.001) for professional services rendered
Issuance of Series A preferred stock at $1.00 125,000 $ 125
Net loss for the period ended December 31, 1988
Issuance of $.001 par value common stock at estimated fair value ($.025) for
professional services rendered
Issuance of common stock pursuant to a four-to-one stock split
Issuance of preferred stock pursuant to a four-to-one stock split 375,000 375
Issuance of Series A preferred stock at $0.25 200,000 200
Net loss for the year ended December 31, 1989
Issuance of $.001 par value common Stock at estimated fair values ($.025 and
$.15) for professional services rendered
Issuance of Series B preferred stock at $0.65 615,385 615
Net loss for the year ended December 31, 1990
Issuance of $.001 par value common stock at estimated fair value ($.15) for
professional services rendered
Redemption of common stock pursuant to a one-for-two reverse stock split
Redemption of preferred stock pursuant to a one-for-two reverse stork split (657,692) (657)
Issuance of $.001 par value common stock at estimated fair value ($.30) for
professional services rendered
Issuance of Series B preferred stock at $1.30 76,923 77
Net loss for the year ended December 31, 1991
---------- ----------
Balance, December 31, 1991 734,616 735
Issuance of $.001 par value common stock at estimated fair value ($.15) for
professional services rendered
Issuance of Series C preferred stock at $1.50 340,000 340
Net loss for the year ended December 31, 1992
---------- ----------
Balance, December 31, 1992 1,074,616 1,075
Conversion of note payable in the principal amount of $100,000 to Series D preferred stock 50,000 50
Issuance of Series D preferred stock at $2.00 950,000 950
Issuance of $.001 par value common stock at estimated fair value ($.20) for
professional services rendered
Net loss for the year ended December 31, 1993
---------- ----------
Balance, December 31, 1993 2,074,616 2,075
Exercise of stock options
Issuance of $.001 par value common stock at estimated fair value ($.20) for
professional services rendered
Net loss for the year ended December 31, 1994
---------- ----------
Balance, December 31, 1994 2,074,616 2,075
Issuance of Series E preferred stock at $1.50 1,566,668 1,566
Exercise of stock warrants at $.50
Exercise of stock options at $.25
Net loss for the year ended December 31, 1995
---------- ----------
Balance, December 31, 1995 3,641,284 3,641
Issuance of Series F preferred stock at $2.00 1,100,000 1,100
Issuance of $.001 par value common stock at estimated fair value ($.20) for license agreement
Net loss for the year ended December 31, 1996
---------- ----------
Balance, December 31, 1996 4,741,284 4,741
Exercise of stock options at $.20
Net income for the year ended December 31, 1997
---------- ----------
Balance, December 31, 1997 4,741,284 $ 4,741
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-4
<PAGE> 9
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK DEFICIT
- --------------- --------------------------------------------- ACCUMULATED
ADDITIONAL ADDITIONAL DURING THE
PAID-IN PAID-IN DEVELOPMENT
CAPITAL SHARES AMOUNT CAPITAL STAGE TOTAL
<C> <C> <C> <C> <C> <C>
232,143 $ 232 $ 232
124,875 125,000
$ (24,866) (24,866)
500 1 $ 12 13
697,929 697 (697)
(375)
49,800 50,000
(98,656) (98,656)
69,427 69 2,011 2,080
399,385 400,000
(164,869) (164,869)
20,500 21 3,054 3,075
(510,250) (510) 510
657
5,000 5 1,495 1,500
99,923 100,000
(306,050) (306,050)
- ----------- --------- ------ ---------- ----------- -----------
674,265 515,249 515 6,385 (594,441) 87,459
3,227 3 481 484
509,660 510,000
(578,872) (578,872)
- ----------- --------- ------ ---------- ----------- -----------
1,183,925 518,476 518 6,866 (1,173,313) 19,071
99,950 100,000
1,899,050 1,900,000
29,784 30 19,649 19,679
(689,434) (689,434)
- ----------- --------- ------ ---------- ----------- -----------
3,182,925 548,260 548 26,515 (1,862,747) 1,349,316
35,250 35 4,547 4,582
1,666 2 332 334
(903,173) (903,173)
- ----------- --------- ------ ---------- ----------- -----------
3,182,925 585,176 585 31,394 (2,765,920) 451,059
2,348,435 2,350,001
20,000 20 9,980 10,000
10,000 10 2,490 2,500
(1,620,808) (1,620,808)
- ----------- --------- ------ ---------- ----------- -----------
5,531,360 615,176 615 43,864 (4,386,728) 1,192,752
2,198,900 2,200,000
25,000 25 4,975 5,000
(142,108) (142,108)
- ----------- --------- ------ ---------- ----------- -----------
7,730,260 640,176 640 48,839 (4,528,836) 3,255,644
1,528 2 304 306
1,465,123 1,465,123
- ----------- --------- ------ ---------- ----------- -----------
$ 7,730,260 641,704 $ 642 $ 49,143 $(3,063,713) $ 4,721,073
=========== ========= ====== ========== =========== ===========
</TABLE>
A-4 cont'd
<PAGE> 10
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997 and 1996 and
for the period from inception, May 4, 1988, to December 31, 1997
<TABLE>
<CAPTION>
INCEPTION,
MAY 4,1988, TO
DECEMBER 31,
1997 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,465,123 $ (142,108) $ (3,063,713)
----------- ----------- --------------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 141,645 114,390 346,328
Issuance of common stock for goods/services 827,099
Provision for bad debts 34,530 35,494
Deferred income tax expense (benefit) 726,000 (726,000)
Changes in operating assets and liabilities:
Inventory 90,272
Accounts receivables 97,016 (84,009) (105,678)
Prepaid expenses (73,851) 12,891 (73,851)
Other current assets 285,580
Other assets, net 422,468 253,660
Accounts payable and accrued liabilities (24,214) 117,573 129,534
Federal income taxes payable 40,236 40,236
----------- ----------- --------------
Total adjustments 1,329,300 (154,773) 1,452,822
----------- ----------- --------------
Net cash provided by (used in) operating activities 2,794,423 (296,881) (1,610,891)
----------- ----------- --------------
Cash flows from investing activities:
Investment in note receivable 1,417
Proceeds from repayment of note receivable (1,417)
Investment in patents and license agreements (61,253) (482,077) (543,330)
Capital expenditures (311,410) (109,595) (615,722)
----------- ----------- --------------
Net cash used in investing activities (372,663) (591,672) (1,159,052)
----------- ----------- --------------
Cash flows from financing activities:
Proceeds from note payable 300,000 400,200
Proceeds from issuance of preferred stock 2,200,000 6,835,001
Proceeds from issuance of common stock
under stock options and warrants 306 17,686
Principal payments on note payable (15,254) (307,620) (337,740)
Principal payments on capital lease (9,326)
----------- ----------- ---------------
Net cash provided by (used in) financing activities (14,948) 2,192,380 6,905,821
----------- ----------- ---------------
Net increase in cash and cash equivalents 2,406,812 1,303,827 4,135,878
Cash and cash equivalents at beginning of period 1,729,066 425,239
----------- ----------- ---------------
Cash and cash equivalents at end of period $ 4,135,878 $ 1,729,066 $ 4,135,878
=========== =========== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-5
<PAGE> 11
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ViroTex Corporation (the "Company") was incorporated on May 4, 1988, to
develop, manufacture and market topical dermatological pharmaceutical
products. The Company has since evolved to a developer of proprietary
drug delivery systems that use the skin and mucosa as the primary site
of delivery. These technologies have a variety of product applications
for local and systemic delivery of pharmaceutical compounds. The
Company has operated as a development stage enterprise since its
inception by devoting substantially all of its efforts to financial
planning, raising capital, research, product and market development and
out-licensing product. Following is a summary of the Company's
significant accounting policies.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity date of
three months or less to be cash equivalents.
INVENTORY
Inventories, consisting of finished goods, are stated at the lower of
cost or market. Cost is determined by the first-in, first out method.
All inventories were sold, transferred or disposed of in 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation for property
and equipment, excluding leasehold improvements, is provided over the
estimated useful lives of the depreciable assets using the
straight-line method for financial reporting purposes. Amortization of
leasehold improvements is provided using the straight-line method over
the estimated useful lives of the improvements or the remaining term of
the lease, whichever is shorter. Additions or improvements that
increase the value or extend the life of an asset are capitalized.
Expenditures for normal maintenance and repairs are expensed as
incurred. Disposals are removed from the accounts at cost less
accumulated depreciation, and any gain or loss from disposition is
reflected in the statements of operations.
INCOME TAXES
The Company uses the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards No. 109 ("SFAS
No. 109"). Under this method, deferred income taxes are recorded to
reflect the tax consequences on future years of temporary differences
between the tax basis of assets and liabilities and their financial
amounts at year end. A valuation allowance is provided, if necessary,
to reduce any resulting deferred tax assets to their net realizable
value.
A-6
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION
Sales and royalty revenue is recognized as earned on the accrual basis
of accounting. Research grants are recognized in income as work is
performed. Deferred federal grants are recorded to reflect amounts
received in excess of costs incurred. During 1997 and 1996, all of the
Company's sales and royalty revenue was derived from one product,
Viractin Cold Sore and Fever Blister medicine ("Viractin") (see Note
11).
RESEARCH AND DEVELOPMENT
Costs of research and development are expensed as incurred.
PATENTS
The Company has applied for certain United States and foreign patents,
some of which are currently pending. Patent costs, which consist
primarily of legal fees, have been capitalized and are amortized,
beginning at the patent issue date, using the straight-line method over
periods ranging from 17 to 20 years. If such patents are rejected, the
costs will be expensed at the date of rejection.
LICENSE AGREEMENTS
The Company periodically acquires rights to utilize technology and
materials required to produce new products. License costs have been
capitalized and are amortized using the straight-line method over a
period of 3 years.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"), which encourages, but does
not require, all entities to record compensation expense on all
stock-based compensation plans based upon fair value. However, it also
allows an entity to continue to measure compensation costs for options
granted to employees using the intrinsic value method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company accounts for
compensation cost for stock issued to employees in accordance with APB
Opinion No. 25. In accordance with FAS 123, the Company has disclosed
pro forma compensation expense as if the fair value-based method of
accounting had been applied. See Note 10.
A-7
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CONCENTRATION OF CREDIT RISK
The Company maintains its cash account with a major investment bank.
Management periodically assesses the financial condition of the
institution and believes that any possible credit risk is minimal.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income") ("SFAS 130"). SFAS
130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. It
requires classification of the components of other comprehensive income
by their nature in a financial statement and the display of the
accumulated balance of the other comprehensive income separate from
retained earnings and additional paid-in capital in the equity section
of a statement of financial position. SFAS 130 is effective for years
beginning after December 15, 1997, and is not expected to have a
material impact on financial position or results of operation.
2. SUPPLEMENTAL CASH FLOW INFORMATION:
Interest expense incurred and paid during the years ended December 31,
1997 and 1996 totaled $784 and $5,759, respectively.
As discussed in Note 7, the Company issued 25,000 shares of common
stock to buy out a license agreement. As of December 31, 1997, the
Company owed $125,000 to the licensor. These noncash transactions have
been excluded from the statements of cash flows.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Furniture and equipment $ 166,281 $ 78,880
Leasehold improvements 67,721 46,987
Research and development equipment 414,319 211,044
Equipment under capital lease agreements 9,326 9,326
--------- ---------
657,647 346,237
Less accumulated depreciation and amortization (163,051) (102,843)
--------- ---------
$ 494,596 $ 243,394
========= =========
</TABLE>
A-8
<PAGE> 14
Notes To Financial Statements, Continued
3. PROPERTY AND EQUIPMENT, CONTINUED:
Included in accumulated depreciation and amortization at December 31,
1997 and 1996 is $9,326 of accumulated amortization on equipment
acquired under capital lease agreements.
Depreciation expense for the years ended December 31, 1997 and 1996 and
for the period from inception, May 4, 1988, to December 31, 1997,
totaled $60,200, $32,900 and $163,000, respectively.
4. OTHER ASSETS:
Other assets consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
License agreement $ 405,000
Restricted cash $ 125,000 225,000
Patents and trademarks 99,591 214,898
Other 34,108 30,987
--------- ---------
258,699 875,885
Less accumulated amortization (17,365) (91,899)
--------- ---------
$ 241,334 $ 783,986
========= =========
</TABLE>
Amortization expense for the years ended December 31, 1997 and 1996 and
for the period from inception, May 4, 1988, to December 31, 1997,
totaled $81,400, $77,400 and $173,300, respectively.
5. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Uncollateralized note payable to the Company's landlord for leasehold
improvements, bearing interest at 9.75% per year and due in
monthly installments of principal and interest of $793 which was
paid in full during fiscal 1997 $ -- $15,254
Less current maturities -- (8,398)
------ -------
Long-term debt, net of current maturities $ -- $ 6,856
====== =======
</TABLE>
A-9
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
In August 1990, the Company's Articles of Incorporation were amended to
authorize 5,000,000 shares of Serial Preferred Stock with a par value
of $.001 per share. In April 1995, the Company's Articles of
Incorporation were amended to increase the authorized shares of Serial
Preferred Stock to 10,000,000 shares. The Company's Board of Directors
is authorized to divide the Preferred Stock into series and to fix and
determine the relative rights and preferences of each series.
Prior to 1992, the Company issued 350,000 and 384,616 shares of Series
A and B convertible Preferred Stock, respectively. In March and June
1992, the Company issued 100,000 and 240,000 shares, respectively, of
Series C convertible Preferred Stock for $510,000 cash. In May 1993,
the Company issued 850,000 shares of Series D convertible Preferred
Stock for $1,600,000 cash and cancellation of a note payable in the
principal amount of $100,000 to a stockholder. In November 1993, the
Company issued an additional 150,000 shares of Series D convertible
Preferred Stock for $300,000 cash. In April 1995, the Company issued
1,566,668 shares of Series E convertible Preferred Stock for $1,550,001
cash and $800,000 in media credits. In July 1996, the Company issued
1,100,000 shares of Series F convertible Preferred Stock for $2,200,000
cash.
The Series A, B, C, D, E and F Preferred Stock (the "Series") each have
par values of $.001, are noncumulative and have liquidation preferences
of $.50, $1.30, $1.50, $2.00, $1.50 and $2.00, respectively.
Additionally, the Series are entitled to vote on all matters submitted
to a vote of the stockholders on an "as if converted basis" and the
holders of Series D and E Preferred Stock, together as a class, are
each entitled to elect one director to the Board of Directors. The
Series are also convertible, at the option of the holder, at any time
after the date of issuance, into shares of common stock as is
determined by the number of Preferred Stock shares outstanding divided
by the respective liquidation preference amount. Additionally, each
share of the Series shall automatically be converted into shares of
common stock at its then effective conversion rate, as defined in the
amended Articles of Incorporation, immediately upon the effectiveness
of a registration statement under the Securities Act of 1933, as
amended, with a firm commitment to underwrite the Company's common
stock for aggregate gross proceeds greater than $10,000,000 and a per
share price greater than $7.50.
COMMON STOCK
In April 1995, the Company's Articles of Incorporation were amended to
increase the authorized shares of common stock to 15,000,000 shares.
In March 1996, the Company issued 25,000 shares of its common stock at
estimated fair value as of the date of grant as part of a license
agreement (see Note 7).
A-10
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. STOCKHOLDERS' EQUITY, CONTINUED:
STOCK PURCHASE WARRANTS
During 1995, the Company issued a warrant to purchase 52,936 shares of
its common stock. The warrant is exercisable at anytime until 2000 at a
price per share of $1.65. This warrant was issued as partial payment
for services provided to the Company.
7. COMMITMENTS AND CONTINGENCIES:
The Company leases its office and laboratory space, as well as certain
office equipment, under noncancelable operating leases through March
2003.
Future minimum payments under noncancelable operating leases, including
modifications made subsequent to December 31, 1997, are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
<S> <C>
1998 $ 146,694
1999 156,556
2000 160,278
2001 159,528
2002 158,004
2003 39,501
-----------
Total minimum lease payments $ 820,561
===========
</TABLE>
Rental expense under operating leases for the years ended December 31,
1997 and 1996 totaled approximately $58,000 and $30,000, respectively.
Subsequent to December 31, 1997, the Company modified its lease of
office space. This modification requires monthly payments of $3,452
from February 2000 through March 2003. In March 1998, the Company
signed a lease with its landlord moving its research facilities to a
new location. This new lease requires monthly payments of $9,715
through March 2003. Upon execution of this lease, the Company was
released from its previous lease of research facilities that required
monthly payments of $2,335 through January 2000.
EMPLOYMENT AGREEMENTS
The Company entered into new employment agreements with two officers of
the Company in fiscal year 1995. These agreements superseded two
agreements previously entered into in fiscal years 1993 and 1992. Under
the terms of the new agreements, the employees are entitled to
compensation ranging from three to nine months if the employees are
terminated prior to the expiration of the agreements. The Company
entered into employment agreements with two new officers of the Company
in fiscal year 1996. Under the terms of these agreements, the employees
are entitled to compensation for three months if the employees are
terminated prior to the expiration of the agreements.
A-11
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. COMMITMENTS AND CONTINGENCIES, CONTINUED:
LICENSE AGREEMENT
In May 1990, the Company entered into a license agreement with
Ginamarie Products (the "Licensor") for the purpose of undertaking
development to manufacture, use and sell certain licensed products.
Under the terms of the agreement, the Company paid a license fee of
$10,000 and shall pay the Licensor royalties equal to the greater of
two percent of the net sales of each licensed product or $25,000 per
year commencing upon the expiration of four years from the effective
date of the agreement.
In March 1996, the Company bought out the license agreement for 25,000
shares of common stock and $400,000 cash, of which $300,000 was placed
in escrow to be paid out over a period of three years on a quarterly
basis at $25,000 per quarter.
8. FEDERAL INCOME TAXES:
At December 31, 1997, the Company had net operating loss carryforwards
available to offset future taxable income as follows:
<TABLE>
<CAPTION>
YEAR EXPIRES
<S> <C>
2009 $ 540,884
2010 1,617,065
2011 823,240
-------------
$ 2,981,189
=============
</TABLE>
Net operating loss carryforwards for financial reporting purposes and
alternative minimum tax reporting purposes are approximately the same
as those under the regular tax method.
Special limitations exist under the tax law which may restrict the
utilization of the regular tax net operating loss carryforwards.
The Company provides a valuation allowance to reduce deferred income
tax assets to their net realizable value. The tax effects of loss
carryforwards that give rise to deferred income tax assets and the
valuation allowance at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net operating losses $ 1,013,604 $ 1,765,006
Alternative minimum tax credits 40,236
Financial accruals (6,693) 23,904
----------- -----------
Gross deferred income tax assets 1,047,147 1,788,910
Valuation allowance (1,047,147) (1,062,910)
----------- -----------
Net deferred income tax asset $ -- $ 726,000
=========== ===========
</TABLE>
A-12
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. FEDERAL INCOME TAXES, CONTINUED:
The difference between the provision (benefit) for federal income taxes
and the amount that would result if the U.S. federal statutory rate of
34% were applied to pretax loss is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- --------------------------
PERCENTAGE OF PERCENTAGE OF
AMOUNT PRETAX INCOME AMOUNT PRETAX (LOSS)
<S> <C> <C> <C> <C>
Expected expense (benefit) at the statutory
tax rate $ 758,700 34% $ (295,157) (34%)
Change in valuation allowance (15,800) (1%) (422,195) (50%)
Adjustment to prior year asset 18,400 1%
Other 4,936 (8,648)
----------- ----- ---------- -----
$ 766,236 34% $ (726,000) (84%)
=========== ====== ========== =====
</TABLE>
9. RELATED PARTY TRANSACTIONS:
The Company made payments for legal, research and development and
consulting services provided by certain stockholders and/or directors
for 1997 and 1996 totaling approximately $59,200 and $21,900,
respectively.
The Company's operating leases for office and research facilities (see
Note 7) and long-term debt (see Note 5) obligations are with The
Woodlands Corporation, a stockholder of the Company.
During 1996, the Company borrowed and repaid $300,000 from Ventures
Medical, L.P., a stockholder of the Company. The Company paid $3,863 of
interest expense in connection with this borrowing.
10. STOCK-BASED COMPENSATION:
STOCK OPTION PLAN
In May 1991, the stockholders approved the Company's 1991 Stock Option
Plan (the "Plan"). The Plan, as amended, provides for the granting of
500,000 stock options to officers, other key employees of the Company
and independent contractors under the terms and conditions determined
by the Board of Directors. Options granted may be either "incentive
stock options," within the meaning of Section 422A of the Internal
Revenue Code, or nonqualified options. The stock options vest over
periods ranging from 2-5 years, and are exercisable over a period
determined by the Board of Directors, but no longer than ten years from
the date of grant. All options become exercisable in full in the event
of a change in control, as defined by the board of directors. The
option price is generally greater than or equal to the fair value of
the common stock at the date of grant. In October 1994, the Board of
Directors approved an additional 500,000 stock options under the Plan.
In July 1996, the Board of Directors approved an additional 500,000
stock options under the Plan. Following is an analysis of stock option
activity in the Plan for the years ended December 31, 1997 and 1996.
A-13
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. STOCK-BASED COMPENSATION, CONTINUED:
STOCK OPTION PLAN, CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------
UNEXERCISED
OPTION OPTIONS AT OPTIONS UNEXERCISED
PRICE PER YEAR BEGINNING OF OPTIONS EXERCISED OR OPTIONS AT EXPIRATION
SHARE GRANTED PERIOD GRANTED CANCELED END OF PERIOD DATE
<S> <C> <C> <C> <C> <C> <C>
$ .50 1997 -- 256,000 -- 256,000 2004
.20 1996 578,297 -- 10,833 567,464 2001,2003
.20 1995 264,899 -- 12,917 251,982 2000,2002
.20 1994 82,378 -- 35,253 47,125 1999
.20 1993 121,253 -- -- 121,253 1999
.15 1992 120,450 -- -- 120,450 1999
--------- --------- --------- ---------
1,167,277 256,000 59,003 1,364,274
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------
UNEXERCISED
OPTION OPTIONS AT OPTIONS UNEXERCISED
PRICE PER YEAR BEGINNING OF OPTIONS EXERCISED OR OPTIONS AT EXPIRATION
SHARE GRANTED PERIOD GRANTED CANCELED END OF PERIOD DATE
<S> <C> <C> <C> <C> <C> <C>
$ .20 1996 -- 578,297 -- 578,297 1999,
2001-2003
.20 1995 312,000 -- 47,101 264,899 1997-1998,
2002
.20 1994 134,203 -- 51,825 82,378 1999
.20 1993 121,253 -- -- 121,253 1999
.15 1992 120,450 -- -- 120,450 1999
--------- --------- --------- ----------
687,906 578,297 98,926 1,167,277
========= ========= ========= ==========
</TABLE>
As of December 31, 1997 and 1996, outstanding stock options which were
exercisable totaled 816,830 and 416,691, respectively. As of December
31, 1997, 1,364,274 options were outstanding with a weighted-average
exercise price of $.25 and a weighted-average contractual life of 4.8
years.
The fair value of each stock option granted during 1997 and 1996 was
estimated as of the date of grant using the minimum value method with
the following weighted-average assumptions for grants in 1997 and 1996:
no dividend yield; no volatility; risk-free interest rates ranging from
5.63% to 6.80%; and expected option lives from 3.5 to 6 years.
Pursuant to APB Opinion No. 25, the Company was not required to
recognize a charge for compensation expense for equity-based
compensation awarded in 1997 or 1996. If the fair value based method of
accounting in FAS 123 had been applied, the Company would have
recognized $13,799 in 1997 and $7,521 in 1996 as compensation expense.
The initial effects of applying FAS 123 are not indicative of future
amounts.
A-14
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. ROYALTIES AND CORPORATE ALLIANCE FEES:
In March 1996, the Company entered into a license agreement (the
"Agreement") with Schering-Plough Healthcare Products, Inc. ("SPHCP")
for the purpose of transferring certain trademarks, patents and
technology associated with Viractin in North America and Mexico. Under
the terms of the Agreement, SPHCP paid the Company a technology access
fee of $750,000, which was recorded as license fees in the statements
of operations. Additionally, SPHCP paid the Company royalties equal to
the greater of ten percent of the net sales of Viractin or $150,000 at
the end of each calendar quarter. For the years ended December 31, 1997
and 1996, the Company recorded $320,000 and $300,000, respectively, in
royalty revenue related to the Agreement. In July 1997, the Company and
SPHCP mutually terminated the Agreement. In July 1997, the Company
entered into an asset purchase agreement (the "Purchase Agreement")
with CEP Holdings, Inc. ("CEP") for the purpose of transferring all
trademarks, patents, technology and assets associated with Viractin.
Under the terms of the Purchase Agreement, CEP paid the Company
$4,500,000. CEP will also pay the Company royalties equal to ten
percent of the net sales of Viractin at the end of each calendar
quarter for five years commencing upon execution of the Purchase
Agreement. For the year ended December 31, 1997, the Company recorded
$67,600 in royalty revenue related to the Purchase Agreement.
Approximately 97% of the Company's 1997 revenues were derived from the
sale of Viractin and royalties received under terms of the agreements
mentioned above.
A-15
<PAGE> 21
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited) (Audited)
------------------ -----------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 1,792,619 $ 4,135,878
Accounts Receivable 62,444 70,184
Prepaid and Other Assets 41,111 73,851
----------- -----------
TOTAL CURRENT ASSETS 1,896,174 4,279,913
----------- -----------
Property and equipment, net 651,299 494,596
Other Assets, net 210,592 241,334
----------- -----------
861,891 735,930
----------- -----------
TOTAL ASSETS $ 2,758,065 $ 5,015,843
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable 110,562 117,254
Accrued Liabilities 141,026 112,280
Current federal income tax payable -- 40,236
----------- -----------
TOTAL CURRENT LIABILITIES $ 251,588 $ 269,770
----------- -----------
Other liabilities -- 25,000
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock 4,741 4,741
Common Stock 668 642
Additional Paid in Capital 7,788,772 7,779,403
Accumulated Deficit (5,287,704) (3,063,713)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,506,477 4,721,073
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 2,758,065 $ 5,015,843
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-16
<PAGE> 22
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
AND FOR THE PERIOD FROM INCEPTION, MAY 4, 1988,
TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
MAY 4, 1988 TO
1998 1997 SEPTEMBER 30, 1998
----------- ----------- ------------------
<S> <C> <C> <C>
REVENUES:
LICENSE FEES $ -- $ 4,575,000 $ 5,400,000
ROYALTIES 142,138 300,000 829,743
SPONSORED RESEARCH 110,000 -- 110,000
NET PRODUCT SALES -- -- 180,339
GRANT REVENUE -- 83,062 199,764
OTHER -- 63,283 88,283
----------- ----------- -----------
TOTAL REVENUES 252,138 5,021,345 6,808,129
----------- ----------- -----------
COST OF SALES -- (414,197) (490,523)
EXPENSES:
RESEARCH AND DEVELOPMENT $ 1,588,136 $ 947,310 $ 4,959,374
SALES AND MARKETING 284,486 292,066 2,894,885
GENERAL AND ADMINISTRATIVE 725,919 627,570 4,094,681
----------- ----------- -----------
TOTAL OPERATING EXPENSES 2,598,541 1,866,946 11,948,940
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (2,346,403) 2,740,202 (5,631,334)
----------- ----------- -----------
INTEREST INCOME AND OTHER 125,029 73,571 400,311
INTEREST EXPENSE (2,617) (1,310) (16,445)
----------- ----------- -----------
NET INCOME (LOSS) BEFORE TAXES (2,223,991) 2,812,463 (5,247,468)
----------- ----------- -----------
CURRENT INCOME TAX EXPENSE -- (40,236) (40,236)
DEFERRED INCOME TAX (EXPENSE) BENEFIT -- (726,000) --
----------- ----------- -----------
NET INCOME (LOSS) $(2,223,991) $ 2,046,227 $(5,287,704)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-17
<PAGE> 23
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
AND FOR THE PERIOD FROM INCEPTION, MAY 4, 1988,
TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
MAY 4, 1988 TO
1998 1997 SEPTEMBER 30, 1998
----------- ----------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income (Loss) $(2,223,991) $ 2,812,463 $(5,287,704)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
Depreciation and amortization 51,550 44,413 397,878
Issuance of common stock for goods and services -- -- 827,099
Provision for bad debts -- -- 35,494
Changes in operating assets and liabilities:
Accounts receivables 7,740 104,988 (97,938)
Prepaid and other assets 32,740 6,893 (41,111)
Other assets, net 81,715 315,879 335,375
Accounts payable and accrued liabilities 72,054 (173,893) 201,588
Increase (decrease) in Federal income taxes payable (40,236) -- --
----------- ----------- -----------
Total adjustments 205,563 298,280 1,658,385
----------- ----------- -----------
Net cash provided by (used in) operating activities (2,018,428) 3,110,743 (3,629,319)
----------- ----------- -----------
Cash flows from investing activities:
Investment in note receivable -- -- 1,417
Proceeds from repayment of note receivable -- -- (1,417)
Investment in patents and license agreements (34,443) 127,355 (577,773)
Capital expenditures (224,783) (240,025) (840,505)
----------- ----------- -----------
Net cash used in investing activities (259,226) (112,670) (1,418,278)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable -- -- 400,200
Proceeds from issuance of preferred stock -- -- 6,835,001
Proceeds from issuance of common stock
under stock options and warrants 9,395 -- 27,081
Principal payments on note payable (75,000) 9,746 (412,740)
Principal payments on capital lease -- -- (9,326)
----------- ----------- -----------
Net cash provided by (used in) financing activities (65,605) 9,746 6,840,216
----------- ----------- -----------
Net increase (decrease)in cash and cash equivalents (2,343,259) 3,007,819 1,792,619
Cash and cash equivalents at beginning of period 4,135,878 1,954,067 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,792,619 $ 4,961,886 $ 1,792,619
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-18
<PAGE> 24
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------ ---------------------------
ADDITIONAL ADDITIONAL DEFICIT ACCUMULATED
PAID-IN PAID-IN DURING THE
SHARES AMOUNT STOCK SHARES AMOUNT STOCK DEVELOPMENT STAGE TOTAL
--------- ------- ---------- ------- ------ ---------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 4,741,284 $ 4,741 7,730,260 641,704 $ 642 49,143 $(3,063,713) $ 4,721,073
Exercise of stock options at $0.20* -- -- -- 12,500 12 2,488 -- $ 2,500
Exercise of stock options at $0.50* -- -- -- 13,792 14 6,881 -- $ 6,895
Net Loss for the period* -- -- -- -- -- -- $(2,223,991) $(2,223,991)
--------- ------- ---------- ------- ------ ---------- ----------- -----------
Balance, September 30, 1998* 4,741,284 $ 4,741 $7,730,260 667,996 $ 668 $ 58,512 $(5,287,704) $ 2,506,447
========= ======= ========== ======= ====== ========== =========== ===========
</TABLE>
* Unaudited
<TABLE>
<S> <C>
Recap of Additional Paid-In Capital
Preferred Stock $ 7,730,260
Common Stock $ 58,512
-----------
Total $ 7,788,772
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-19
<PAGE> 25
VIROTEX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements included herein are unaudited, condensed and
do not contain all information required by generally accepted accounting
principles to be included in a full set of financial statements. In the opinion
of management, all adjustments considered necessary (which consist only of
normal recurring accruals) for a fair presentation have been included. The
results of operations for any interim period are not necessarily indicative of
results of operations for the entire year. These financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 1997 included with this report.
NOTE 2. SUBSEQUENT EVENTS
ViroTex develops over-the-counter and prescription products based on
proprietary drug delivery systems that provide topical and transmucosal delivery
of medications requiring quick onset of action. On November 24, 1998 Atrix
Laboratories, Inc. a Delaware corporation ("Atrix"), completed the acquisition
of ViroTex through the merger of its wholly-owned subsidiary, Atrix Acquisition
Corporation, a Delaware corporation, with and into ViroTex.
Under the terms of the Agreement and Plan of Reorganization dated
November 24, 1998 (the "Merger Agreement"), the stockholders of ViroTex are
entitled to receive $7.5 million in cash and $500,000 in value of shares of the
Registrant's common stock, $.001 par value (the "Common Stock"). In addition,
the ViroTex stockholders are entitled to receive additional consideration of up
to $3,000,000, payable in shares of Common Stock or cash, upon satisfaction of
certain earn-out events set forth in the Merger Agreement related to the
performance of certain products of ViroTex. Atrix also issued a warrant to
purchase shares of Common Stock in replacement of a warrant to purchase shares
of ViroTex common stock for partial payment of services provided to ViroTex, and
agreed to replace certain options held by employees of ViroTex who will become
employees or consultants of Atrix.
A-20
<PAGE> 26
Attachment B
<TABLE>
<S> <C>
Introduction to Unaudited Condensed Combined Pro Forma Financial
Statements of Atrix Laboratories, Inc. and ViroTex Corporation B-1
Unaudited Condensed Combined Pro Forma Balance Sheet
as of September 30, 1998 B-2
Unaudited Condensed Combined Pro Forma Statements of Operations
for the Nine Months Ended Ended September 30, 1998 B-3
Unaudited Condensed Combined Pro Forma Statements of Operations
for the Year Ended December 31, 1997 B-4
Notes to Unaudited Condensed Combined Pro Forma Financial
Statements B-5
</TABLE>
<PAGE> 27
INTRODUCTION TO UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS
ATRIX LABORATORIES, INC. AND VIROTEX CORPORATION
(UNAUDITED)
The following unaudited condensed combined pro forma financial
statements are based on the historical financial statements of Atrix
Laboratories, Inc. ("Atrix") and ViroTex Corporation ("ViroTex") for the year
ended December 31, 1997 and the nine-month periods ended September 30, 1998. The
pro forma financial statements have been prepared to give effect to the merger
("Transaction") between Atrix and ViroTex.
The accompanying Unaudited Condensed Combined Pro Forma Income
Statements for the year ended December 31, 1997 and for the nine month period
ended September 30, 1998 have been presented on the assumption that the
transactions occurred on January 1, 1997 and January 1, 1998, respectively. The
accompanying Unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1998 has been presented on the assumption that the transactions
occurred as of September 30, 1998. The unaudited pro forma adjustments are
described in the accompanying notes.
The unaudited pro forma financial information presented does not
attempt to quantify any operating expense synergies or cost reductions of the
combined operations of Atrix and ViroTex that may be realized after the
Transaction. Nor does the unaudited pro forma financial information consider the
incremental expense, capital or conversion costs which may be incurred as a
result of the Transaction.
These unaudited pro forma financial statements are not necessarily
indicative of the results of operations that would have been reported if the
transactions had occurred at the time presented and are not necessarily
indicative of the results that will be achieved for future periods as a result
of the transactions. However, Atrix management does anticipate that the
acquisition will positively impact the Atrix financial condition and operating
results over the expectant lives of the acquired technologies.
The pro forma financial information should be read in conjunction with
the historical financial statements of Atrix included in Form 10-K for the
period ended December 31, 1997 and the historical financial statements of
ViroTex included in this report.
These unaudited condensed financial statements are prepared based on a
preliminary allocation of purchase price to the assets of ViroTex. This estimate
is subject to change as a result of further analysis of the amount allocated to
in process research and development.
B-1
<PAGE> 28
ATRIX LABORATORIES, INC.
CONDENSED COMBINED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
PURCHASE
PRO FORMA
ATRIX VIROTEX ADJUSTMENTS TOTAL
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,285,276 $ 1,792,619 $ (6,124,661)(a) $ 12,953,234
Marketable securities, at fair market value 50,638,857 -- 50,638,857
Accounts receivable, net 852,454 62,444 -- 914,898
Interest receivable 797,252 -- 797,252
Inventories 2,827,503 -- 2,827,503
Prepaid expenses and deposits 830,743 41,111 -- 871,854
------------ ------------ ------------ ------------
Total current assets 73,232,085 1,896,174 (6,124,661) 69,003,598
============ ============ ============ ============
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 9,641,360 882,430 (335,655)(b) 10,188,135
Accumulated depreciation and amortization (3,021,432) (231,131) 231,131 (b) (3,021,432)
------------ ------------ ------------ ------------
Property, plant and equipment, net 6,619,928 651,299 (104,524) 7,166,703
------------ ------------ ------------ ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization 1,122,736 133,199 -- 1,255,935
Deferred finance costs, net of accumulated amortization 1,740,116 -- -- 1,740,116
Goodwill -- -- 3,727,214(c) 3,727,214
Other assets -- 77,393 -- 77,393
------------ ------------ ------------ ------------
Total other assets 2,862,852 210,592 3,727,214 6,800,658
------------ ------------ ------------ ------------
TOTAL ASSETS $ 82,714,865 $ 2,758,065 $ (2,501,971) $ 82,970,959
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,042,335 $ 110,562 $ -- $ 1,152,897
Interest payable 1,155,479 -- -- 1,155,479
Accrued salaries and payroll taxes 230,774 -- 508,404(d) 739,178
Other accrued liabilities 56,123 141,026 561,000(e) 758,149
------------ ------------ ------------ ------------
Total current liabilities 2,484,711 251,588 1,069,404 3,805,703
------------ ------------ ------------ ------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 50,000,000 -- -- 50,000,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock 0 4,741 (4,741)(f) --
Common stock 11,323 668 (517)(g) 11,474
Additional paid-in capital 73,456,858 7,788,772 (6,752,797)(h) 74,492,833
Unrealized holding gain (loss) on marketable securities 377,943 -- -- 377,943
Treasury stock (435,001) -- -- (435,001)
Accumulated deficit (43,180,969) (5,287,704) 3,186,680 (i) (45,281,293)
------------ ------------ ------------ ------------
Total shareholders' equity 30,230,154 2,506,477 (3,571,375) 29,165,256
------------ ------------ ------------ ------------
TOTAL $ 82,714,865 $ 2,758,065 $ (2,501,971) $ 82,970,950
============ ============ ============ ============
</TABLE>
B-2
<PAGE> 29
ATRIX LABORATORIES, INC.
CONDENSED COMBINED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PURCHASE
PRO FORMA
ATRIX VIROTEX ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C>
REVENUE:
Sales and royalty $ 2,281,124 $ 142,138 $ -- $ 2,423,262
Contract revenue 423,521 110,000 -- 533,521
License fees -- -- -- --
Sale of marketing rights 12,000,000 -- -- 12,000,000
Interest income 2,838,843 125,029 (229,675)(j) 2,734,197
Other income (loss), net 57,317 -- -- 57,317
------------ ------------ ------------ ------------
Total revenue 17,600,805 377,167 (229,675) 17,748,297
------------ ------------ ------------ ------------
EXPENSES:
Cost of goods sold 1,466,822 -- -- $ 1,466,822
Research and development
- - ATRIDOX(TM)product 2,656,980 -- -- 2,656,980
- - Other 5,764,323 1,588,136 -- 7,352,459
Interest expense 2,669,720 2,617 -- 2,672,337
Administrative and marketing 1,869,095 1,010,405 2,879,500
Amortization of goodwill -- -- 559,082 (k) 559,082
============ ============ ============ ============
Total expenses 14,426,940 2,601,158 559,082 17,587,180
============ ============ ============ ============
NET INCOME (LOSS) BEFORE INCOME TAX 3,173,865 (2,223,991) (788,757) 161,117
============ ============ ============ ============
Current income tax expense -- -- (5,478)(l) (5,478)
Deferred income tax (expense) benefit -- -- (54,780)(m) (54,780)
============ ============ ============ ============
$ 3,173,865 $ (2,223,991) $ (849,015) $ 100,859
============ ============ ============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ 0.28 $ 0.08
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING: 11,293,149 37,860 (q) 11,331,009
</TABLE>
B-3
<PAGE> 30
ATRIX LABORATORIES, INC.
CONDENSED COMBINED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PURCHASE
PRO FORMA
ATRIX VIROTEX ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C>
REVENUE:
Sales and royalty $ 1,895,179 $ 387,605 $- $ 2,282,784
Contract revenue 854,081 83,062 -- 937,143
License fees -- 4,575,000 -- 4,575,000
Sale of marketing rights 7,100,000 -- -- 7,100,000
Interest income 1,725,836 136,471 (306,233)(n) 1,556,076
Other income (loss), net (29,797) 88,283 -- 58,486
------------ ------------ ------------ ------------
Total revenue 11,545,301 5,270,421 (306,233) 16,509,489
------------ ------------ ------------ ------------
EXPENSES:
Cost of goods sold 1,533,441 -- -- $ 1,533,441
Research and development -- --
- - ATRIDOX(TM)product 5,455,693 -- -- 5,455,693
- - Other 6,088,900 1,367,922 -- 7,456,822
Costs related to license fees 414,197 -- 414,197
Administrative and marketing 2,333,984 1,256,943 -- 3,590,927
Amortization of goodwill -- -- 745,443 (o) 745,443
============ ============ ============ ============
Total expenses 15,412,018 3,039,062 745,443 19,196,523
============ ============ ============ ============
NET INCOME (LOSS) BEFORE INCOME TAX (3,866,717) 2,231,359 (1,051,676) (2,687,034)
============ ============ ============ ============
Current income tax expense -- (40,236) 40,236 (p) --
Deferred income tax (expense) benefit -- (726,000) 726,000 (p) --
------------ ------------ ------------ ------------
$ (3,866,717) $ 1,465,123 $ (285,440) $ (2,687,034)
============ ============ ============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.35) (0.24)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 11,133,669 37,860 (q) 11,171,529
</TABLE>
B-4
<PAGE> 31
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
ATRIX LABORATORIES, INC. AND VIROTEX CORPORATION
(a) To reflect the ViroTex acquisition for a cash purchase price of
$6,124,661 as a component of the purchase price of ViroTex.
(b) To reflect the preliminary estimate of the fair value of the property,
plant, and equipment under purchase accounting.
(c) To reflect the preliminary estimate of goodwill under purchase
accounting.
(d) To reflect the obligations for severance pay as the result of the
acquisition of ViroTex.
(e) To reflect the obligations for investment banking and legal fees as
the result of the acquisition of ViroTex.
(f) To reflect the elimination of preferred stock of ViroTex.
(g) To reflect the elimination of ViroTex common stock and the issuance of
Atrix common stock as a component of the purchase price of ViroTex.
(h) To reflect the elimination of ViroTex additional paid in capital and
the issuance of Atrix common stock as a component of the purchase price
of ViroTex.
(i) To reflect the elimination of ViroTex accumulated deficit and the
preliminary estimate of in-process R&D.
(j) To reflect potential reduction in interest income due to cash paid for
the purchase of ViroTex for the nine month period.
(k) To reflect the potential amortization expense for the nine month period
on goodwill of $3,727,214 over a five year period.
(l) To reflect alternative minimum tax expense at a rate of 10% of the
Federal income tax for the periods presented.
(m) To reflect income tax expense at a rate of 34% for the periods
presented.
(n) To reflect potential reduction in interest income due to cash paid for
the purchase of ViroTex for the twelve month period.
(o) To reflect the potential amortization expense for the twelve month
period on goodwill of $3,727,214 over a five year period.
(p) ViroTex and Atrix have not been subject to income tax as a result of
their net operating loss carryforward position.
(q) To reflect ViroTex acquisition for the issuance of 37,860 shares as a
component of the purchase price of ViroTex.
B-5
<PAGE> 32
General and Administrative expense does not include one-time expenses related to
severance pay, investment banking fees, and legal fees of $369,295, $450,000,
and $111,000, respectively, as a result of the Transaction.
Research and Development expense does not include one-time expense related to
severance pay of $139,109 as a result of the Transaction.
The expense for in process research and development of $2,891,213 was not
included in the pro forma income statements. Such expense is based on
preliminary estimates and is subject to change.
B-6
<PAGE> 33
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------
<S> <C>
23. Consent of PricewaterhouseCoopers LLP.
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements No.
33-49268, No. 33-64029 and No. 333-29325 of Atrix Laboratories, Inc. on Form
S-8, and No. 333-43191 and No. 333-68585 of Atrix Laboratories, Inc. on Form
S-3, of our report dated May 4, 1998, appearing in this Amendment No. 2 to Form
8-K dated November 24, 1998 of Atrix Laboratories, Inc.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 11, 1999
