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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________.
COMMISSION FILE NUMBER: 000-23265
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SALIX PHARMACEUTICALS, LTD.
(Exact name of Registrant as specified in its charter)
BRITISH VIRGIN ISLANDS 94-3267443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 WEST BAYSHORE ROAD, SUITE 205
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices, including zip code)
(650) 856-1550
(Registrant's telephone number, including area code)
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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 of the Registrant's Common Stock outstanding as of
May 2, 2000 was 10,747,838.
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SALIX PHARMACEUTICALS, LTD.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999.................................... 1
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 (unaudited)..................... 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 (unaudited)..................... 3
Notes to Condensed Consolidated Financial Statements.................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 14
PART II. OTHER INFORMATION
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Item 2. Changes in Securities and Use of Proceeds .................................. 14
Item 6. Exhibits and Reports on Form 8-K .......................................... 14
Signatures ............................................................................. 15
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
March 31, December 31,
2000 1999
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(unaudited) ASSETS
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Current assets:
Cash and cash equivalents........................................................ $ 1,239 $ 2,402
Accounts receivable.............................................................. 881 287
Inventory........................................................................ 369 378
Prepaids and other current assets................................................ 165 390
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Total current assets...................................................... 2,654 3,457
Property and equipment, net........................................................ 89 151
Other assets....................................................................... 51 51
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$ 2,794 $ 3,659
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other current liabilities............................ $ 1,160 $ 1,444
Commitments ---- ----
Shareholders' equity:
Preferred stock, issuable in series, no par value;
5,000,000 shares authorized; none outstanding........................ ---- ----
Common stock, no par value; 40,000,000 shares authorized; 10,710,838
shares issued and outstanding at March 31, 2000
and 10,208,838 shares issued and outstanding at
December 31, 1999 27,727 27,626
Accumulated deficit....................................................... (26,093) (25,411)
---------- ----------
Shareholders' equity................................................. 1,634 2,215
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$ 2,794 $ 3,659
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The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
Three months ended
March 31,
------------------------------
2000 1999
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Revenues:
Product revenue..................................................... $ 380 $ 74
Revenue from collaborative agreements and other............ 467 484
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Total revenues................................................. 847 558
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Expenses:
Cost of products sold............................................... 313 261
License fees.......................................................... --- 197
Research and development........................................ 570 1,171
General and administrative........................................ 644 583
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Total expenses................................................. 1,527 2,212
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Loss from operations.......................................................... (680) (1,654)
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Interest, and other (expense)/income, net............................ (2) 37
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Net loss......................................................... $ (682) $ (1,617)
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Net loss per share, basic and diluted........................................ $ (0.06) $ (0.16)
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Shares used in computing net loss per share, basic and diluted......... 10, 610 10,209
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The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
Three months ended
March 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................. $ (682) $ (1,617)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 53 23
Loss on disposal of equipment 13 ---
Changes in assets and liabilities:
Accounts receivable, inventory and other current assets..... (360) 83
Accounts payable and other current liabilities...................... (284) (301)
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Net cash used in operating activities........................... (1,260) (1,812)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in short term investments....................................... --- (11)
Purchases of property and equipment...................................... (4) (7)
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Net cash used in investing activities............................... (4) (18)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock .................................. 101 ---
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Net cash provided by financing activities.............................. 101 ---
Net decrease in cash and cash equivalents......................................... (1,163) (1,830)
Cash and cash equivalents at beginning of period.................................. 2,402 2,763
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Cash and cash equivalents at end of period........................................ $ 1,239 $ 933
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The accompanying notes are an integral part of these financial statements.
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SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Salix Pharmaceuticals, Ltd. was incorporated in the British Virgin
Islands in December 1993 for the purpose of acquiring all of the
outstanding capital stock of Salix Pharmaceuticals, Inc., a California
corporation ("Salix California"), and Glycyx Pharmaceuticals, Ltd., a
Bermuda corporation. Salix California was incorporated in California in
1989 and Glycyx was incorporated in Bermuda in 1992. The Company is
developing new pharmaceuticals, primarily focused in the area of
gastrointestinal disease. The Company intends to commercialize its
pharmaceutical products through its own direct sales force in the United
States and via third party distributors or sub-licensees in other
territories. The Company conducts its business within one industry
segment.
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. All amounts
are denominated in United States dollars.
The accompanying unaudited condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
items) which, in the opinion of management, are necessary for a fair
presentation of financial position, results of operations and cash flows.
These financial statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results
of Operations included elsewhere in this Report and with the audited
financial statements for the fiscal year ended December 31, 1999 included
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 filed with the Securities and Exchange Commission. The
results of operations for interim periods are not necessarily indicative
of results to be expected for a full year.
These statements have been prepared in accordance with accounting
principles generally accepted in the United States. The application of
these principles conforms in all material respects with financial
statements prepared using accounting principles generally accepted in
Canada. The Company's Common Shares are traded on The Toronto Stock
Exchange under the symbol "SLX."
2. COMMITMENTS
At March 31, 2000, the Company had a binding purchase order
commitment for inventory purchases aggregating approximately $0.9 million
to be delivered in 2000.
3. INVENTORY
All inventories at December 31, 1999 were classified as raw
materials. Inventories at March 31, 2000 consisted of raw materials of
$232,000 and finished goods of $137,000.
4. LIQUIDITY AND CAPITAL RESOURCES
The Company has sustained continuing operating losses and expects to
incur further substantial losses until product approvals are obtained and
product revenues reach a sufficient level to support ongoing operations.
The Company believes that the Company's cash reserves at March 31, 2000
and projected milestones should be sufficient to satisfy the cash
requirements of the Company's product development programs at least
through the second quarter of 2000.
5. CHANGE IN USEFUL LIFE OF COMPUTER EQUIPMENT
During the first quarter of 2000 the Company reduced the useful life
of computer equipment from five to three years. The effect of this change
was to reduce first quarter net income by $34,000. The full year effect
in 2000 will be to reduce net income by $33,000 and the corresponding net
income benefit in future periods will be $19,000 in 2001, and $14,000 in
2002.
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SALIX PHARMACEUTICALS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT. THE FOLLOWING DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "DOLLARS" OR "$" REFER TO
UNITED STATES DOLLARS. THE COMPANY'S COMMON SHARES TRADE ON THE TORONTO STOCK
EXCHANGE AND ARE QUOTED IN CANADIAN DOLLARS.
OVERVIEW
The Company's objective is to be a market-driven specialty
pharmaceutical company focussed on the needs of physicians specializing in
gastroenterology. The Company intends to establish a small direct sales force to
promote its products to this specialist audience. The Company's strategy is to
identify and acquire products that have near-term commercial potential and apply
its regulatory and product development expertise to commercialize these
products. The Company selects products that it believes serve a gastrointestinal
disease in need of new treatments, have the potential for rapid regulatory
approval, and are marketable to this small group of specialized physicians. The
Company believes this strategy will reduce the expense, time and risk normally
associated with pharmaceutical development. The Company believes that its first
two products, balsalazide disodium, presently marketed in the United Kingdom,
Sweden and Denmark under the brand names COLAZIDE(R), COLAZID(R) and PREMID(R),
respectively, and rifaximin, will demonstrate the Company's ability to execute
this strategy.
The Company has generated limited revenues to date from the sales of
products, and it has been unprofitable since inception. The Company had cash
balances of approximately $1.2 million as of March 31, 2000. The Company expects
both sales revenues and operating expenses to increase as the Company expands
upon its balsalazide commercialization efforts and continues product development
and clinical programs for rifaximin. These factors raise doubts about the
ability of the Company to continue as a going concern and the audit report filed
with Form 10-K for the year ended December 31, 1999 contains an explanatory
paragraph with respect to this matter. As of March 31, 2000, the Company had
accumulated losses of approximately $26.1 million. Since 1992, the Company has
financed its operations principally through reimbursement payments, license fees
and milestone revenues, totaling approximately $19.9 million under collaborative
research and licensing agreements, and sales of equity and convertible debt
securities totaling approximately $27.7 million. Over the same period, the
Company has recorded expenses totaling $39.2 million, of which $23.1 million
were in research and development expenses and $1.6 million in license fees to
licensors. Alliances with Astra AB (now AstraZeneca) and a division of Menarini
Pharmaceutical Industries s.r.l. have allowed the Company to fund the
development of balsalazide, to in-license other gastrointestinal products, and
to help establish itself with a relatively small amount of outside capital.
The Company licensed balsalazide from Biorex Laboratories Limited in
exchange for participation in future milestone revenues and profits. The Company
out-licensed balsalazide, which is manufactured by third parties under contract
with the Company, to AstraZeneca and Menarini in their respective territories in
return for a combination of license fees, milestone payments, and contributions
to research and development expenses plus the supply of product at an agreed
formula price. In 1999 Astra AB merged with Zeneca PLC, a British pharmaceutical
company, to create AstraZeneca PLC. In December 1999 the Company and AstraZeneca
signed an agreement under which the marketing and distribution rights for
balsalazide disodium previously licensed by the Company to Astra would return to
the Company. Under the agreement AstraZeneca is continuing to distribute
balsalazide in those countries where it is currently being sold, namely the
United Kingdom, Sweden and Denmark, while the Company pursues alternatives for
marketing and distribution in those countries. All rights, intellectual property
and information relating to balsalazide
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were returned to the Company and future milestone payments from AstraZeneca have
been terminated. As part of the agreement, the Company received $1.0 million in
December 1999 relating to previously earned research and development funding,
and AstraZeneca agreed to loan the Company $500,000 under certain conditions.
The Company received the full amount of this loan in April 2000. The Company
intends to out-license balsalazide in all former AstraZeneca territories except
for the United States. However, there is no guarantee that the Company will be
successful in this endeavor and failure to secure a new distribution partner, or
partners, could have a material adverse impact on the Company's financial
condition and future results from operations. If successful in obtaining
regulatory approval for balsalazide from the FDA, the Company intends to
establish its own direct sales force to market balsalazide in the United States.
Although the creation of an independent sales organization will require a
substantial investment by the Company, the Company anticipates that the
financial results from balsalazide, rifaximin and future products, if approved,
will be more favorable to the Company than those anticipated from the indirect
sale of product through marketing partners. The Company had planned for the
establishment of a direct sales force on the approval of rifaximin, however the
return of balsalazide rights allows the Company to establish itself as a direct
sales and marketing organization earlier than it had anticipated. The Company is
currently unable to provide a meaningful estimate of the investment required to
create an independent sales organization because that investment is dependent on
a number of contingencies, including receipt of necessary regulatory approvals
and developments with current and future strategic partners.
Balsalazide was first approved in the United Kingdom in July 1997 for
the treatment of acute ulcerative colitis and launched by AstraZeneca under the
brand name COLAZIDE(R) in October 1997. Following receipt of pricing approvals
AstraZeneca launched balsalazide in Sweden and Denmark in March 1999.
AstraZeneca has also received approval for Balsalazide in Argentina, Austria,
Belgium, Brazil, Czech Republic, Iceland, Luxembourg, Norway, and Switzerland,
and applications are pending in several other countries. Balsalazide is also
approved in Italy, where following receipt of pricing approval it will be
distributed by Menarini. The Company expects Menarini to obtain the pricing
approval and launch balsalazide in Italy during 2000. In response to the
Company's submission of an NDA, the Company has received an "approvable" letter
from the United States Food and Drug Administration indicating that balsalazide
may be approved upon the satisfactory completion of product labeling and final
resolution of the product brand name.
Product revenues to date have resulted primarily from AstraZeneca's
sales of balsalazide in the United Kingdom, Sweden and Denmark. The Company has
to date recognized only nominal product revenues from sales of balsalazide to
Menarini for use in production trials. The Company is obligated to pay to
Biorex, the original licensor of the product, a portion of any gross profit on
balsalazide sales outside the United States, and will also share with Biorex any
licensing fees received from distribution partners outside the United States. In
addition, the Company anticipates product costs will remain high until
production volumes increase, thereby allowing the Company to benefit from
economies of scale.
The Company's second product, rifaximin, is currently under
development. The Company obtained the rights to develop, make, use and sell
rifaximin in Canada and the United States from Alfa Wassermann S.p.A. in
exchange for future royalties and milestone payments. Under a separate
agreement, Alfa Wassermann will supply Salix with bulk active ingredient
rifaximin at a fixed price.
The Company intends to pursue regulatory approvals for the initial
indication for rifaximin, bacterial infectious diarrhea, with the cost of the
clinical trials being borne by the Company. The Company is currently sponsoring
a Phase III trial for the treatment of infectious bacterial diarrhea in
travelers, which is expected to be completed during 2000. The Company plans
further development of rifaximin for several other possible indications, which
may include hepatic encephalopathy and antibiotic associated colitis. In
February 1998, the Company received Orphan Drug Designation from the FDA for
rifaximin to treat hepatic encephalopathy. Orphan Drug Designation can entail
advantages in the testing and approval process for the drug.
RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
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For the three-month period ended March 31, 2000, the Company recognized
product revenue from sales to AstraZeneca of $380,000 and revenue from its
agreement with AstraZeneca of $467,000. During the corresponding three-month
period ended March 31, 1999 the Company recorded product revenues of $74,000 and
revenue from collaborative agreements of $484,000. Higher product revenues in
the three months ended March 31, 2000 are attributable to the completion of
back-orders following the production difficulties experienced during 1999.
Operating expenses for the three months ended March 31, 2000 and 1999
were $1.5 million and $2.2 million, respectively. The decrease in operating
expenses from the corresponding prior year three-month period was mainly due to
lower research and development costs and non-recurring license fees to licensors
as noted below.
Cost of products sold for the three months ended March 31, 2000 were
$313,000 compared with $261,000 during the corresponding three-month period
ended March 31, 1999. The increase in cost of products sold is attributable to
higher product sales in the current quarter. The smaller increase in cost of
products sold as compared to the increase in product revenues is a result of
production losses and costs relating to the validation of an additional contract
manufacturer during the prior year period.
No license fees were payable during the three months ended March 31,
2000. License fees of $197,000 were recorded during the corresponding three
months ended March 31, 1999, relating to the Company's recognition of revenue
from collaborative agreements as a result of the approval of balsalazide
disodium for sale in Sweden.
Research and development expense was $570,000 for the three months
ended March 31, 2000 compared to $1.2 million during the corresponding
three-month period in 1999. The decrease in research and development expenses in
2000 is due primarily to the completion of a balsalazide disodium clinical trial
initiated in late 1997 in the United States.
General and administrative expenses were $644,000 and $583,000 for the
three months ended March 31, 2000 and 1999, respectively. The increase is mainly
attributable to professional and consulting fees relating to the Company's
planned growth in the United States and a one-time charge to depreciation of
$34,000 relating to a reduction in the estimated useful life of computer
equipment.
Lower net interest and other income/(expense) for the three months
ended March 31, 2000 compared to the same three-month period last year is mainly
attributable to reduced interest on smaller average cash balances in 2000.
The Company experienced a net loss of $682,000 for the three months
ended March 31, 2000 compared with a net loss of $1.6 million in the
corresponding three-month period last year. The lower net loss for the current
three-month period is attributable to higher revenues and lower expenses as
noted above.
YEAR 2000 COMPLIANCE
The Company has not suffered from, nor is the Company aware of, any
problems experienced by its primary vendors, suppliers and financial
institutions related to the changeover to the year 2000. However, there can be
no assurance that year 2000 problems will not arise in the future.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed product development,
operations and capital expenditures primarily from funding arrangements with
collaborative partners and from public and private sales of debt and equity
securities.
As of March 31, 2000, the Company had approximately $1.2 million in
cash and cash equivalents. As of December 31, 1999, the Company had
approximately $2.4 million in cash and cash equivalents. The decrease of $1.2
million was due primarily to cash used to fund the operating activities of the
Company.
As of March 31, 2000, the Company had no long-term obligations. As of
March 31, 2000 the Company had non-cancelable purchase order commitments for
inventory purchases of approximately $0.9 million. The Company has
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not quantified, but anticipates potentially significant capital expenditures in
2000 related to establishing a direct sales and marketing organization. On April
3, 2000 the Company received a loan of $500,000 from AstraZeneca. The loan is
repayable under certain circumstances upon the Company successfully
out-licensing balsalazide in the former AstraZeneca territory.
The Company has sustained continuing operating losses and had an
accumulated deficit of $26.1 million as of March 31, 2000. The Company expects
to incur substantial and increasing operating losses until product approvals are
obtained and product revenues reach a sufficient level to support ongoing
operations. The Company believes its cash and investment balances at March 31,
2000 should be sufficient to satisfy the cash requirements of the Company
through at least the second quarter of 2000. However, the Company's actual cash
requirements might vary materially from those now planned because of a number of
factors, including the results of research and development activities, FDA and
foreign regulatory processes, establishment of and change in relationships with
strategic partners, technological advances by the Company and other
pharmaceutical companies, the terms of the Company's collaborative arrangements
with strategic partners, and the status of competitive products. The Company
intends to enter into a collaborative arrangement with a corporate partner or
partners for the distribution rights to balsalazide outside of the United States
which will provide the Company with additional funding in the form of licensing,
milestone and/or royalty payments. However, there can be no assurance that the
Company will succeed in this endeavor. If successful, the Company anticipates
that this funding will enable the Company to continue its operations through
2000 and until such time, if at all, that it needs to raise additional funds in
the form of debt or equity financing to fund future licensing, development and
commercialization of rifaximin and new products. The Company might also enter
into additional collaborative arrangements with corporate partners that could
provide the Company with additional funding in the form of equity, debt,
licensing, milestone and/or royalty payments. There can be no assurance that the
Company will be able to enter into such arrangements or raise any additional
funds on terms favorable to the Company. Further, because the Company does not
have a definitive funding agreement in place there can be no assurance as to the
Company's ability to continue as a going concern and the audit report filed with
Form 10-K for the year ended December 31, 1999 contains an explanatory paragraph
with respect to this matter.
FACTORS THAT MAY AFFECT FUTURE RESULTS
LACK OF SALES AND MARKETING EXPERIENCE. The Company has no experience
in marketing and selling of its products either directly or through its
relationships with licensees. The Company's sales and marketing strategy for
balsalazide outside of the United States relies on its third-party licensees, to
whom the Company has granted, or foresees granting, exclusive marketing rights.
There can be no assurance that either Menarini or new licensees will market
balsalazide successfully in any country in which they have exclusive rights. The
Company intends to establish its own direct sales force to promote sales of
balsalazide, rifaximin and other future products in the United States, if
approved. There can be no assurance that the Company's marketing and direct
sales efforts will be successful.
DEPENDENCE ON CURRENTLY LICENSED PRODUCTS; UNCERTAINTY OF REGULATORY
APPROVAL OF THE COMPANY'S PRODUCTS. The Company's future success will depend,
among other factors, on its ability to in-license, develop and commercialize new
pharmaceutical products. The Company currently licenses two pharmaceutical
products, balsalazide and rifaximin, and the Company's prospects over the next
three to five years are substantially dependent on regulatory approval and
successful commercialization of these products. The Company has in-licensed
certain rights to balsalazide and rifaximin in certain markets from Biorex and
Alfa Wassermann, respectively. In addition, the Company has entered into an
agreement relating to the development, commercialization, manufacture and
marketing of balsalazide with Menarini, and is actively seeking a new corporate
partner to replace AstraZeneca for the distribution of balsalazide outside of
the United States.
Development, manufacture and marketing of both balsalazide and
rifaximin are subject to extensive regulation by governmental authorities in the
United States and other countries. The FDA has not approved either balsalazide
or rifaximin for use in the United States. In March 2000, the Company received
an "approvable" letter indicating that Company's application may be approved
upon satisfactory completion of product labeling and final resolution of the
product brand name. While the Company believes that it can successfully fulfill
the FDA requirements contained in this approvable letter and thereby obtain
marketing approval, there can be no assurance that its efforts in this regard,
in whole or in part, will be successful. If any issue contained in the
approvable letter is not
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resolved to the satisfaction of the FDA, there can be no assurance that approval
will be granted. If regulatory approval of balsalazide or any other product is
granted, such approval will be limited to those disease states and conditions
for which the product has been shown to be safe and effective, as demonstrated
to the FDA's satisfaction through well controlled clinical studies. Furthermore,
approval may entail ongoing requirements for post-marketing studies. Even if
such regulatory approval is obtained, a marketed product, promotional activities
for the product, its manufacturer and its manufacturing facilities are subject
to continual review and periodic inspections. In addition, identification of
certain side effects after a drug is on the market or the occurrence of
manufacturing problems could cause subsequent withdrawal of approval,
reformulation of the drug, additional preclinical testing or clinical trials and
changes in labeling of the product.
Balsalazide was approved by the United Kingdom in July 1997 for the
treatment of acute ulcerative colitis and launched by AstraZeneca under the
brand name COLAZIDE(R) in October 1997. Following receipt of pricing approvals
AstraZeneca launched balsalazide in Sweden and Denmark in March 1999.
AstraZeneca has also received approval for Balsalazide in Argentina, Austria,
Belgium, Brazil, Czech Republic, Iceland, Luxembourg, Norway, and Switzerland.
Balsalazide has also been approved in Italy, where following receipt of pricing
approval it will be distributed by Menarini. AstraZeneca and Menarini withdrew
marketing applications from certain other European Union countries that had
questions that could not be addressed within the time constraints of the review
period required by the mutual recognition process of the European Union. These
countries are Finland, France, Germany, Greece, Ireland, Netherlands, Portugal,
and Spain. Resubmission in these countries will primarily be the responsibility
of our licensees and there can be no assurance that they will pursue such
applications or, if they do that they will be successful. There can be no
assurance that balsalazide will receive approval from regulatory agencies in any
member country of the European Union where the marketing application was
withdrawn. Even if such approvals are ultimately received, there can be no
assurance as to the timing of such approvals or market acceptance of balsalazide
for the approved indications, or that the Company's marketing partners will
launch balsalazide in the countries where the marketing application has been
approved.
With respect to rifaximin, Alfa Wassermann completed a clinical trial
in Spain relating to the drug as a therapy for hepatic encephalopathy. The
Company determined through discussions with the FDA that this study is not
sufficient support for the filing of an NDA with the FDA. The Company has
initiated a Company-sponsored trial for the indication of bacterial infectious
diarrhea that is expected to be completed during 2000. There can be no assurance
that this new clinical trial for rifaximin will demonstrate that the drug is
safe and effective for the indication tested, that such clinical trial will
support the filing of an NDA for rifaximin as a therapy for infectious diarrhea,
that in the event an NDA is filed with the FDA, the Company will be successful
in obtaining regulatory approval in the United States, or that the Company will
obtain regulatory approval for rifaximin from authorities in any other foreign
jurisdiction.
The Company expects that a significant portion of its potential
revenues for the next few years will depend on regulatory approval and sales of
these products. Failure to obtain regulatory approvals, delays in obtaining
regulatory approvals, obtaining regulatory approvals for balsalazide or
rifaximin in only limited markets or for limited uses, or lack of market
acceptance for either product, to the extent regulatory approvals are obtained,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
HISTORY OF OPERATING LOSSES; EXPECTATION OF FUTURE LOSSES. The
Company's operations have consisted primarily of development of its products and
sponsorship with third parties of research and clinical trials. The Company has
had no earnings to date and has not realized any material operating revenues
from product sales, either directly by the Company or indirectly through its
development and distribution partners. Substantially all of the Company's
revenues to date have been derived from milestone payments from the Company's
collaborative partners related to the development of balsalazide and limited
product sales of Colazide(R) in the United Kingdom, Sweden and Denmark. As of
March 31, 2000, the Company had incurred cumulative losses since inception of
approximately $26.1 million. The Company currently expects operating losses to
continue until product approvals are obtained and product revenues reach a
sufficient level to support ongoing operations. The Company's future operating
performance will depend on its ability to out-license balsalazide in the former
AstraZeneca territory, the timing of regulatory approvals, if any, of
balsalazide and rifaximin, particularly the timing of FDA approval, and, if such
approvals are obtained, the extent of market acceptance, and the Company's
ability to manufacture those products at an acceptable cost.
9
<PAGE>
DEPENDENCE ON COLLABORATIVE PARTNERS/NEW COLLABORATIVE PARTNER. The
commercialization of balsalazide outside of the United States is entirely
dependent on Menarini and any new collaborative partner or partners in their
respective territories. Under the terms of the December 1999 agreement with
AstraZeneca, AstraZeneca will continue to distribute balsalazide in those
countries in which it is currently being marketed while the Company pursues
alternatives for marketing and distribution. Should the Company be unsuccessful
in securing a new distribution partner, AstraZeneca may after an agreed date
cease to distribute balsalazide. There can be no assurance that the Company will
be successful in securing a new distribution partner for balsalazide in those
countries or if it is that it will be able to negotiate terms for the
distribution rights on equivalent or more favourable terms than those under
which the Company originally licensed the rights to AstraZeneca. Should the
Company fail to secure an alternative for the distribution of balsalazide, and
should AstraZeneca cease to distribute balsalazide it could have a material
adverse effect on the Company's business, financial condition, and results of
operations. The Company intends also to seek a new partner or partners for those
countries where balsalazide is currently approved but not yet marketed and those
countries where balsalazide is not currently approved, including those E.U.
countries where the application was withdrawn by AstraZeneca. There can be no
assurance that the Company will be able to find a new distribution partner for
these countries, or if it does that approvals in those countries will be
granted. Although Menarini has agreed to use its best endeavors to promote,
market, and sell balsalazide disodium in its exclusive markets, there are no
specified financial thresholds that must be achieved for Menarini to maintain
its exclusivity. The Company's agreement with Menarini provides for a term of
not less than 10 years from first launch. Although Menarini has advised the
Company that it intends to seek approval in the countries for which marketing
applications were withdrawn, the responsibility to complete the approval process
lies with Menarini and not the Company. There can be no assurance that Menarini
will seek such approvals, or if it does, that approval will be granted.
There can be no assurance that the Company will be able to negotiate
acceptable collaborative arrangements in the future or that its current or
future collaborative arrangements, including the agreement with Menarini, will
be successful or will not be terminated by the other party. Although the Company
believes that parties to any collaborative arrangements would have an economic
motivation to succeed in performing their contractual responsibilities, the
amount and timing of resources to be devoted to these activities in most
instances will not be within the control of the Company. Failure of the Company
and its collaborative partners to develop, commercialize, manufacture or market
products, including balsalazide, would have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING. The Company currently
does not manufacture its potential pharmaceutical products, including
balsalazide and rifaximin, and, therefore, is dependent on contract
manufacturers for the production of such products for development and commercial
purposes. The Company has experienced supply problems due to its dependence upon
a limited number of contract manufacturers, which have manifested in shortages
of finished product in the marketplace. In the event that the Company is
unsuccessful in obtaining or retaining third-party manufacturing or if the
Company's manufacturers experience production difficulties, delays or
disruptions or fail to comply with regulatory requirements, the Company may not
be able to obtain adequate supplies of products in a timely fashion or at
acceptable quality and price or to commercialize its potential products as
planned. No assurances can be given that the Company or its manufacturing
partners will be able to manufacture future developed products in commercial
quantities sufficient to meet the Company's business objectives. Under the terms
of the Company's distribution agreement with Menarini, the obligations of
Menarini to purchase product will terminate under certain circumstances in which
the Company is unable or unwilling to adequately supply them with product. In
such circumstances Menarini is granted a temporary license to manufacture
balsalazide. Under certain situations, such manufacturing license may become
permanent, in which case the Company's revenues from the arrangements could be,
depending on the circumstances, severely reduced or eliminated. The Company
anticipates that future agreements with new distribution partners will contain
similar clauses. Moreover, contract manufacturers that the Company may use must
adhere to current Good Manufacturing Practices, which are regulations strictly
enforced by the FDA through its facilities inspection program. If these
facilities cannot pass a pre-approval plant inspection, the likelihood of the
FDA's pre-market approval of balsalazide will be adversely affected. Certain
material manufacturing changes that may occur after approval are also subject to
FDA review and approval. There can be no assurance that the FDA or other
regulatory agencies will approve the processes or the facilities by which any of
the Company's products may be manufactured. In addition, if the facilities
cannot pass regular post-approval inspections, manufacturing and distribution
may be disrupted, recalls of distributed products may be necessary, and other
sanctions could be applied.
10
<PAGE>
Any disruption in the supply in manufacturing and marketing of the Company's
proposed products would have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON IN-LICENSING AND ACQUISITION OF NEW PRODUCTS FOR FUTURE
GROWTH. Whether or not balsalazide or rifaximin receives regulatory approvals
and is successfully marketed, the Company's ability to grow in the future will
depend on its success in in-licensing or acquiring additional pharmaceutical
products. The Company seeks to in-license or acquire pharmaceutical products
that have been developed beyond the initial discovery phase and for which
late-stage human clinical data is already available. There can be no assurance
that such pharmaceutical products will be available on attractive terms for
in-licensing or acquisition by the Company.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's future success will
depend in part on its ability to develop and commercialize new products,
including balsalazide and rifaximin, or new formulations of or indications for
current products. Assuming the Company can successfully develop such products
and obtain regulatory approvals, their future success will depend upon their
acceptance by the medical community and third-party payers as useful and
cost-effective. Market acceptance will depend upon several factors, including
the establishment of the safety, effectiveness, patient tolerance, and cost of
the Company's products relative to those of competitors. The Company and its
collaborative partners may be required to engage in extensive advertising,
educational programs or other means to market its products. Failure of any of
the Company's products to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON EXCLUSIVE LICENSES. The Company's rights to balsalazide
and rifaximin are derived from its license agreements with Biorex and Alfa
Wassermann, respectively. The Company's rights under these licenses are subject
to early termination under certain circumstances, including material breach by
the Company, the bankruptcy or insolvency of the Company and the Company's
failure to satisfy its manufacturing obligations under its agreements with
distribution partners. In the event that Biorex or Alfa Wassermann terminate
their respective license agreements, the Company would have no further rights to
utilize their respective patents or trade secrets to manufacture and market
products based on balsalazide or rifaximin, as the case may be. The Company's
licenses for balsalazide and rifaximin provide that the Company's royalty
obligations may extend beyond the expiration date of the underlying patents.
This could have a material adverse effect on the Company's business, financial
condition and results of operations in the event a generic version of
balsalazide or rifaximin were introduced. In addition, the Company's license
agreement with Alfa Wassermann provides that the Company may not promote,
distribute or sell any antibiotic products that compete with rifaximin in its
licensed territory (the United States and Canada) for a period of five years
after the first commercial sale of rifaximin under the agreement, thereby
limiting the Company's ability to in-license, develop or market such products.
PATENTS AND PROPRIETARY RIGHTS; EXPIRATION OF PATENTS. Because of the
substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. Because
the Company's strategy is to in-license or acquire pharmaceutical products which
typically have been discovered and initially researched by others, such products
may have limited or no remaining patent protection due to the time elapsed since
their discovery. The patents for the balsalazide composition of matter and
method of treating ulcerative colitis with balsalazide expire in July 2001 in
the United States, April 2002 in Germany, May 2002 in France, July 2006 in
Italy, and July 2006 in the United Kingdom. The patents for the method of
treating colon cancer using balsalazide expire in January 2014 in the United
States and, assuming patents issue from pending applications, in January 2015 in
various countries in Europe, Asia and North America. The patents for the
rifaximin composition of matter (also covering a process of making rifaximin and
using rifaximin to treat gastrointestinal infectious diseases) expire in May
2001 in the United States and Canada. The patents for another process of making
rifaximin expire in April 2005 in both the United States and Canada. Patents for
the use of rifaximin for H. PYLORI infections expire in June 2013 in the United
States and February 2014 in Canada. The Company has been successful in obtaining
patent extensions of five years in both Italy and the United Kingdom, and the
Company believes it may be granted additional extensions of up to five years in
certain circumstances, based on patent term restoration procedures established
in Europe and in the United States under the Waxman-Hatch Act for products that
have received regulatory approval. However, there can be no assurance that any
extensions will be granted. The Company has filed applications for use patents
for additional indications using balsalazide and related chemical substances.
There can be no assurance that any patents will be issued. There can be no
assurance that
11
<PAGE>
competitors will not design around existing patents. Sales of such generic
versions could have an adverse effect on the Company's business, financial
condition and results of operations. The Company's success will depend in part
on its ability to obtain United States and foreign patent protection for its
products and processes, preserve its trade secrets and operate without
infringing on the proprietary rights of third parties. There can be no assurance
that patents will issue with respect to, or that the claims allowed will provide
sufficient protection to, the Company's present or future technology.
There can be no assurance that any other patents will be issued on any
of the Company's patent applications or on patent applications licensed from
third parties. Moreover, there can be no assurance that claims allowed in the
patents or patent applications are or will be sufficiently broad to protect the
Company's technology or that the patents will provide protection against
competitive products or otherwise be commercially valuable.
Furthermore, the Company's patent and other proprietary rights are
subject to uncertainty. The Company's patent or other proprietary rights related
to its products might conflict with current or future rights of others. For
instance, there is no assurance that the use of the Company's technology will
not infringe the patent rights of others. For the same reasons, the products of
others could infringe the patent or other proprietary rights of the Company.
Litigation or patent interference proceedings, either of which could result in
substantial cost to the Company, may be necessary to enforce any patents issued
to and other proprietary rights of the Company or to determine the scope and
validity of other parties' proprietary rights. The defense and prosecution of
patent and intellectual property claims are both costly and time-consuming, even
if the outcome is favorable to the Company. Any adverse outcome could subject
the Company to significant liabilities to third parties, require disputed rights
to be licensed from third parties, or require the Company to cease selling its
products.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which it seeks to
protect, in part, through confidentiality agreements with its collaborative
partners, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently developed by others.
There can be no assurance that the Company will be able to obtain a
license to any third-party technology that it may require to conduct its
business or that, if obtainable, such technology can be licensed at a reasonable
cost. Failure by the Company to obtain a license to any technology that it may
require to commercialize its technologies or products will have a material
adverse effect on the Company. In addition, there can be no assurance that
others will not independently develop substantially equivalent proprietary
information or obtain access to the Company's know-how, or that others will not
be issued patents which prevent the manufacture or sale of Company products or
require licensing and the payment of significant fees or royalties by the
Company in order for it to be able to carry on its business. Litigation, which
could result in substantial cost to the Company, may be necessary to enforce or
defend the Company's patents or proprietary rights.
INTENSE COMPETITION. Competition in the pharmaceutical industry is
intense and characterized by extensive research efforts and rapid technological
progress. The Company believes that there are numerous pharmaceutical and
biotechnology companies, both public and private and including large well-known
pharmaceutical companies, as well as academic research groups throughout the
world engaged in research and development efforts with respect to pharmaceutical
products targeted at gastrointestinal diseases and conditions addressed by the
Company's current and potential products. In particular, the Company is aware of
products in research or development by competitors that address the diseases
being targeted by the Company's products. There can be no assurance that
developments by others will not render the Company's current and potential
products obsolete or non-competitive. Competitors may be able to complete the
development and regulatory approval process sooner and, therefore, market their
products earlier than the Company. Many of the Company's competitors have
substantially greater financial, marketing and personnel resources and
development capabilities than the Company. For example, many large, well
capitalized companies already offer products in the United States and Europe
that target the proposed indications for balsalazide, including mesalamine
(SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn, Inc., Solvay
S.A., The Procter & Gamble Company, and Shire Pharmaceuticals plc),
sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia & Upjohn,
Inc.). Technological developments by competitors, earlier regulatory approval
for marketing competitive products, or superior marketing capabilities possessed
by competitors could
12
<PAGE>
adversely affect the commercial potential of the Company's products, including
balsalazide, and could have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, manufacturers of
generic drugs may seek to compete directly with the Company's products in the
absence of effective patent protection or non-patent exclusivity protection.
CURRENCY FLUCTUATIONS. A significant portion of the Company's business
is conducted in currencies other than the United States dollar. Foreign currency
transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the United States dollar have caused and will continue to
cause currency transaction gains and losses. Although translation into the
Company's reporting currency has not historically had a material impact on the
Company's financial position, due to the substantial volatility of currency
exchange rates, among other factors, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. There can be no
assurance that the Company will not experience currency losses in the future.
The Company has not previously undertaken hedging transactions to cover its
currency exposure but may hedge a portion of its currency exposure in the future
as management deems appropriate.
MANAGEMENT OF GROWTH AND EXPANSION. The Company expects to experience
significant growth in the number of its employees and the scope of its
operations. The Company intends to establish its headquarters and sales office
in Raleigh, North Carolina. This growth and expansion is expected to place a
significant strain on the Company's management and operations. The Company's
ability to manage such growth effectively will depend upon its ability to
broaden its management team and its ability to attract, hire and retain skilled
employees. The Company's success will also depend on the ability of its officers
and key employees to continue to implement and improve its operational,
management information and financial control systems and to expand, train and
manage its employee base. The Company's inability to manage growth effectively
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL. The Company
is dependent upon a number of key management and technical personnel, including
Randy Hamilton, Chairman, Lorin Johnson, Vice President, Research (Salix
California), Robert Ruscher, President and Chief Executive Officer, John Brough,
Chief Financial Officer and President (Glycyx Pharmaceuticals, Ltd.), Lise
Riopel, PhD., Vice President, Clinical Affairs (Salix California), and Alvaro
Carvajal, Vice President, Information Systems. Because the loss of the services
of one or more of these key employees could have a material adverse effect on
the Company, the Company has entered into employment agreements with each of
these key personnel to provide for an extended transition period in the event of
resignation. The Company's success will also depend on its ability to attract
and retain additional highly qualified management and technical personnel. The
Company faces intense competition for qualified personnel, many of whom are
often subject to competing employment offers. In the event the Company obtains
regulatory approvals for balsalazide and rifaximin in the United States, it
intends to sell those products through a small direct sales force. New
employees, particularly new sales and marketing employees, will require
substantial training and education concerning the Company's products. There can
be no assurance that the Company will be successful in attracting and retaining
qualified personnel as necessary and the failure to do so could have a material
adverse effect on the Company's business, operating results and financial
condition.
PRICE VOLATILITY; LIMITED TRADING VOLUME. The securities markets have
from time to time experienced significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. In addition,
the market prices of the common stock of many publicly traded pharmaceutical and
biotechnology companies have in the past and can in the future be expected to be
especially volatile. Announcements of technological innovations or new products
by the Company or its competitors, developments or disputes concerning
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by the Company or its competitors,
regulatory developments in both the United States and other countries, public
concern as to the safety of pharmaceutical products and economic and other
external factors, as well as period-to-period fluctuations in the Company's
financial results, may have a significant impact on the market price of the
Company's Common Shares. The Company's Common Shares have been traded on The
Toronto Stock Exchange since May 1996. No public trading market exists for the
Common Shares in the United States. In addition, trading volume in the Common
Shares on The Toronto Stock Exchange has been low and there can be no assurances
that an active trading market will develop or be sustained on The Toronto Stock
Exchange or any other exchange or dealer quotation system.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in Pounds Sterling. Translation
into the Company's reporting currency, the United States dollar, has not
historically had a material impact on the Company's financial position.
Additionally, the Company's net assets denominated in currencies other than the
functional currency have not exposed the Company to material risk associated
with fluctuations in currency rates. Given these facts, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates.
Due to the nature and maturity of the Company's short-term investments
the Company does not believe such investments present significant market risk.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2000 the Company completed the private placement under Section
4(2) of the Securities Act of 1933 of 500,000 Common Shares to Mr. Robert P.
Ruscher, President and Chief Executive Officer of the Company, for net proceeds
of approximately $100,000 in cash. No underwriters were involved in this
transaction
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K with the United States Securities and
Exchange Commission on January 13, 2000 relating to the adoption by the Board of
Directors of the Company of a Shareholder Protection Rights Agreement between
the Company and Montreal Trust Company of Canada.
14
<PAGE>
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.
SALIX PHARMACEUTICALS, LTD.
Date: May 12, 2000 By: /s/ Robert Ruscher
----------------------------------
Robert Ruscher, President and
Chief Executive Officer
Date: May 12, 2000 By: /s/ John Brough
----------------------------------
John Brough, Chief Financial Officer
15
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