SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
to
Commission file number 0-29350
VASOGEN INC.
(Exact name of Registrant as specified in its charter)
VASOGEN INC.
(Translation of Registrant's name into English)
Province of Ontario, Canada
(Jurisdiction of incorporation or organization)
2155 Dunwin Drive, Suite 10
Mississauga, Ontario L5L 4M1 Canada (Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common shares as of the close of the period covered by the annual
report - 26,574,110 shares outstanding
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Indicate by check mark which financial statement item the Registrant has elected
to follow. Item 17 . Item 18 X .
<PAGE>
PART I
Item 1. Description of Business1.
General
Vasogen Inc., which together with its subsidiaries, is hereinafter
referred to as the "Company" or the "Corporation" or "Vasogen", is focused on
the development and commercialization of its therapies for immune system
modulation for the treatment of cardiovascular, autoimmune, and other
cell-mediated inflammatory conditions. Delivered by a medical device technology,
these immune modulation therapies utilize components derived from a patient's
own blood which are believed to down-regulate or inhibit destructive immune
processes involved in a number of major diseases. In collaboration with leading
university research centres, the Company has therapies in development for the
treatment of cardiovascular and autoimmune disease, and for the prevention or
amelioration of ischemia/reperfusion injury. Vasogen is also developing a
process for treating bone marrow to prevent graft-versus-host disease ("GvHD"),
a life- threatening complication of bone marrow transplantation.
Delivered by a platform medical device technology, Vasogen's therapies
are designed to target fundamental disease causing processes more effectively
while causing fewer side effects than current therapies. The Company has an
active research and development program for new products and for the advancement
of existing products. The Company controls the development and manufacture of
its technologies for use in pre-clinical and clinical research and continues to
advance its product development program to support future commercial scale
production. Patent applications are filed by the Company to protect its products
and processes. The Company's policy is to file patent applications to protect
inventions, technology, and improvements that are important to the development
of its business and with respect to the application of its therapies to the
treatment of a number of disease indications.
The Company intends to commercialize its therapies through licensing
agreements with established health care companies.
For the two fiscal years ended November 30, 1998 and 1997, the Company
spent a total of $4,656,643 Cdn2 and $5,351,578 Cdn., respectively, on research
and development.
1 See Glossary at the end of section for terms used throughout this Annual
Report.
2 Unless indicated otherwise, all references in this Annual Report are expressed
in Canadian dollars. The following table sets forth the exchange rates for one
Canadian dollar expressed in terms of one U.S. dollar for the past five years.
<TABLE>
<CAPTION>
Average Low - High Year End
<S> <C> <C> <C> <C>
1994 .7300 .7103 - .7631 .7178
1995 .7305 .7023 - .7527 .7323
1996 .7332 .7140 - .7472 .7301
1997 .7223 .7020 - .7487 .7020
1998 .6743 .6311 - .7123 .6523
</TABLE>
The exchange rates are based upon the noon buying rate in New York City for
cable transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York.
At May 19, 1999, one Canadian dollar, as quoted by National Bank at 9:00
a.m., for foreign exchange cash selling rates was $0.6868 in U.S. dollars.
<PAGE>
Corporate History
The Company was incorporated under the Business Corporations Act
(Ontario) by Certificate and Articles of Incorporation dated January 10, 1980 as
amended by certificates and articles of amendment dated September 19, 1985; June
15, 1988; and April 21, 1994.
Immune Modulation Therapy
Vasogen's immune modulation therapies utilize components derived from a
patient's blood that are believed to down-regulate or inhibit the destructive
immune processes involved in a number of major diseases. These therapies are
designed to target fundamental disease-causing processes more effectively, with
fewer side effects, than current therapies. The administration of these
therapies involves the withdrawal of a small sample of a patient's blood, its
subsequent processing, and the readministration of the processed blood to the
patient. The procedure can be performed in 30 minutes. A typical course of
therapy involves 30-minute procedures administered on a outpatient basis over a
two to three-week period.
Delivery Technology
The Company has developed a platform medical device technology for the
production of immune modulation therapies and for the processing of donor bone
marrow. The medical device is designed to apply a number of physicochemical
stress factors such as heat and oxidation, to a sample of a patient's own blood.
The system employs a single use disposable unit, which contains the patient's
blood or donor bone marrow during processing.
All products are designed, manufactured, and serviced under Vasogen's quality
system, which is registered to ISO 9001 and EN 46001. ISO 9001 is an
internationally recognized standard governing the establishment and maintenance
of quality management systems. The standard prescribes the characteristics of a
company's quality system needed for registration under ISO 9001. These
characteristics apply to most aspects of a company's operations including order
review, purchasing, manufacturing and testing, design, servicing and training.
EN 46001 is a European standard which prescribes the additional characteristics
of a quality system needed for the development and manufacture of medical
devices. Operation of a compliant quality management system and registration
under both ISO 9001 and EN 46001 are one method a company can pursue to achieve
CE Marking of medical devices necessary for introduction to the European market.
Ongoing compliance of a quality management system registered under these
standards is monitored both by Company internal audit and by periodic audits by
accredited third party organizations, known as Notified Bodies.
Products
Vasogen's research program is focused on the development of products to
address significant market opportunities as described below. Immune modulation
therapies currently in development include: VasoCare(TM) therapy for the
treatment of cardiovascular disease, VAS971 for the prevention or amelioration
of ischemia/reperfusion injury, and VAS972 for the treatment of autoimmune
disease. The Company is also developing VAS981 for treating bone marrow prior to
transplantation to prevent GvHD.
<PAGE>
VasoCare(TM) Therapy and Cardiovascular Disease
VasoCare(TM) therapy is being developed for the treatment of
cardiovascular disease. Cardiovascular disease is the leading cause of death and
disability in the western world. The disease generally results from narrowing of
the arteries (atherosclerosis), which leads to heart attack, stroke, and the
symptoms of peripheral vascular disease. The Company has received European
regulatory approval for VasoCare(TM) therapy for the treatment of peripheral
vascular disease.
Atherosclerosis, the build-up of fat-containing plaque within the blood
vessel wall, is a common cause of many types of cardiovascular disease. In the
United States alone, 13.9 million people suffer from coronary heart disease
while another 4 million people suffer from stroke (American Heart Association
website. Cardiovascular Disease Statistics - www.americanheart.org). A key
factor in the initiation of atherosclerotic plaque formation is believed to be a
dysfunction of the endothelial cells that line blood vessel walls. Endothelial
cells exposed to injury become "sticky" through up-regulation or stimulation of
adhesion molecules (Anderson et al. 1995. Systemic nature of endothelial
dysfunction in atherosclerosis. American Journal of Cardiology 75: 71B-74B).
This causes leukocytes to adhere and migrate through the endothelium, a process
accompanied by the release of cytokines and other inflammatory mediators that
cause further endothelial dysfunction. Endothelial dysfunction further enhances
the ability of LDL cholesterol to migrate into the blood vessel wall and it is
the presence of the oxidized LDL molecules in the wall of the blood vessel that
attracts the leukocytes to the site. There are indications that there may be a
significant autoimmune component in atherosclerosis. Although the experimental
evidence of Tcell driven autoimmune activity, even at the earliest stages of
atherosclerosis is considerable, it is not yet clear whether autoimmunity is an
initiating or secondary factor in causing the disease. Autoimmunity does appear,
however, to play an important role in the progression of the atherosclerotic
process referred to as atherogenesis.
Vasogen is initially developing VasoCare(TM) therapy for the treatment
of peripheral vascular disease ("PVD"), a serious form of cardiovascular disease
that affects an individual's extremities, particularly the legs and feet. An
estimated 5.6 million people in North America and Europe suffer from the
disease. PVD results in leg pain when walking, progresses to pain at rest and,
in approximately 25% of patients requires expensive medical intervention such as
balloon angioplasty, surgical bypass graft or amputation (Tooke and Lowe. A
Textbook of Vascular Medicine. Oxford University Press Inc. New York. page 164).
Management estimates that surgery for PVD costs health care systems in North
America and Europe in excess of ten billion dollars annually.
VasoCare(TM) therapy is being developed for PVD patients primarily as a
therapy to prevent or reverse progression of the disease and to reduce the need
for surgical intervention. VasoCare(TM) therapy may potentially be a
prophylactic therapy in an area that currently has no effective prophylactic
treatment. The therapy may also improve walking distance, reduce pain, and
improve quality of life.
<PAGE>
A key risk factor in atherosclerosis and the resulting cardiovascular
disease has been shown to be high blood lipids (LDL cholesterol and
triglycerides). During 1998, Vasogen completed pre-clinical studies in a
standard animal model of atherosclerosis conducted by Drs. Duncan Stewart and
Dr. Pierre Picard of the Division of Cardiology, St. Michael's Hospital at the
University of Toronto. Based on the results of these studies, the Company filed
a patent application with the United States Patent Office in respect of a method
of lowering blood lipids (LDL cholesterol and triglycerides). At least fifty
percent of patients with symptomatic coronary heart disease have elevated blood
cholesterol levels. Reduction through diet and cholesterol-lowering drugs
significantly reduces the likelihood of future heart attacks and death. However,
diet is only partially effective, and most of the currently used drugs, although
effective, have significant side effects and are costly. Although triglycerides
are not as directly atherogenic as cholesterol, they are closely linked with
recognized coronary risk factors, including diabetes, obesity and hypertension.
During 1998, the Company also initiated a controlled randomized
double-blind clinical study in PVD at the Universities of Bristol and Dundee,
UK. A common form of PVD is that caused by obstructions in the arterial blood
flow in the extremities, secondary to atherosclerosis. An initial open clinical
study at the Bristol Royal Infirmary, University of Bristol, UK, was completed
on patients with PVD and intermittent claudication (severe leg pain upon
walking). As a group, the patients in this study experienced a significant
increase in their pain-free walking distance after receiving VasoCare(TM)
therapy and maintained this improvement for a minimum of six weeks after
therapy. Some patients continued to show an improvement after six months.
The Company has also conducted research into a form of PVD known as
Raynaud's disease. Patients with Raynaud's suffer a wide range of symptoms from
mild cold intolerance to severe and disabling pain in the fingers and toes on
exposure to cold, loss of feeling in the extremities, digital skin ulcers, and,
in some cases, gangrene leading to amputation. During 1996, based on results
from a pilot study conducted at the University of London, the Company conducted
a double blind, placebo controlled study in 38 Raynaud's disease patients at the
University of Dundee, Scotland, under the direction of professor J.J.F. Belch.
Primary Raynaud's is a seasonal disease, the symptoms of which are brought on by
exposure to cold. Accordingly, trials into Raynaud's disease must be conducted
during the winter months. In 1997, Dundee experienced an unexpectedly early
spring, with the average maximum temperature in March reaching 11(degree)C--34%
warmer than the 30 year average. For this reason, for the analysis of the
results, the patients enrolled in the trial were split into two groups--those
who had completed the trial before the warm weather set in and those who had
not. Of the sixteen patients who received treatment prior to the onset of warm
weather, nine received VasoCare(TM) therapy and seven received placebo
treatment. In the VasoCare(TM)-treated group, there was a 51 percent improvement
in the severity of patients' symptoms. The improvement in the
VasoCare(TM)-treated group was double that of the 24 percent improvement
reported in the group who received a placebo treatment. The level of improvement
in the placebo group was consistent with the placebo effect reported in other
Raynaud's trials. The second group of Raynaud's patients in the Dundee trial, as
expected, appeared to benefit from the warmer weather, with both the treated and
placebo groups showing a similar improvement in their symptoms. There were no
reports of significant adverse side effects associated with VasoCare(TM)
therapy.
<PAGE>
During the 1994 - 1995 period, the Company conducted a pilot study on
four patients with severe primary Raynaud's disease. The Raynaud's study was
completed under the direction of Dr. E. D. Cooke, director of the Clinical
Microvascular Unit at St. Bartholomew's Hospital in London, England. The four
severe Raynaud's patients recruited for this open trial were all female and
ranged in age from 15 to 80. All had been subjected to the available medical
treatments, none of which were successful. Following a course of VasoCare(TM)
therapy, all four patients responded positively and showed a significant
(p<0.05) improvement in endothelial function reflecting an improved skin blood
flow. The results of this study were presented at an international vascular
meeting in March 1996 and published in the International Angiology Journal
(International Angiology Journal, 1997; 16:250-4). Their Raynaud's symptoms were
alleviated for time periods ranging from a minimum of three months to over 18
months with no significant adverse side effects observed. The Company also
conducted basic research into the effects of VasoCare(TM) therapy on blood
components. In vitro experiments produced evidence that VasoCare(TM) therapy
significantly inhibits the aggregation of platelets and increases the production
of vasodilators nitric oxide and prostacyclin in vitro. Following these results,
the Company completed a controlled study in healthy volunteers to determine the
systemic effects of VasoCare(TM) therapy and to confirm the safety profile of
this therapy. The results of this trial showed that, following VasoCare(TM)
therapy, there was an increase in the production of systemic prostacyclin. In
addition, upregulation of the expression of immune cell surface markers,
including HLA-DR, which is associated with cell activation, was observed.
VasoCare(TM) therapy resulted in significant increases in this marker in the
treated group, while no significant changes were detected in a control group
given a placebo treatment. There were no significant adverse side effects
associated with VasoCare(TM) therapy. Based on current plans, the Company
anticipates having sufficient data concerning VasoCare(TM) therapy to conclude a
strategic alliance within 15 months.
VAS971 and Pre-conditioning against Ischemia Reperfusion Injury
VAS971 is being developed for the prevention or amelioration of
ischemia/reperfusion injury during major vascular surgery. Each year, more than
500,000 major vascular surgical procedures are performed in North America and
Europe (1 Espicom. Medical Markets of Western Europe. West Sussex, UK: Espicom
Business Intelligence Publications Limited, 1997 and 2 Health Care Costs and
Utilization Project. HCUP-3 Nationwide Inpatient Sample Release 3 for 1994.
Hyattsville, MD: US Department of Health and Human Resources, 1996). During
these procedures, the blood supply to major organs is often interrupted,
resulting in injury to the organs. This is known as ischemia/reperfusion ("I/R")
injury. Ischemia is a lack of blood flow; reperfusion is the return of blood
flow. Both ischemia and reperfusion cause damage to organs and tissues.
Three surgical interventions that result in I/R injury are coronary
artery bypass graft ("CABG") procedures, abdominal aortic aneurysm ("AAA")
repair surgery and thoracic aortic aneurysm ("TAA") repair surgery. Vasogen is
initially developing VAS971 to prevent organ damage in patients who undergo TAA
repair surgery. A thoracic aortic aneurysm is a weakness or bulge in the wall of
the upper part of the aorta, which, if not repaired, could lead to blood vessel
rupture and death from internal bleeding. It is estimated that more than 10,000
TAA repairs are performed annually in North America and Europe at an average
cost of $71,000 per procedure (Rice et al. Financial impact of thoracoabdominal
aneurysm repair. 1993 American Journal of Surgery 166:186-190). If the Company's
efforts with respect to TAA repairs are successful, the Company intends to
pursue expansion into other markets such as AAA or CABG.
<PAGE>
TAA repair surgery poses significant perioperative risk, requiring the
aorta to be clamped for up to one hour, cutting off blood flow and potentially
causing I/R injury to the kidneys, bowel, liver, and spinal cord. As well,
because of the major nature of the surgery and the fact that most patients have
underlying generalized vascular disease, cardiac, pulmonary, and cerebral
complications are common. Management estimates that TAA surgery results in a
major complication rate of approximately 42% and death in approximately 7% of
cases and that long-term direct health care costs resulting from complications
associated with the TAA repair procedure exceed $30,000 per patient, on average.
Based on pre-clinical studies to date, treatment with VAS971 prior to
surgery could have a significant effect in reducing ischemia/reperfusion injury
during major surgery, considerably reducing morbidity and mortality. Using two
different animal models, Vasogen has shown that pre-treatment with VAS971 causes
a significant reduction in I/R injury to the kidney by reducing the level of I/R
injury induced cell death in this organ. Data confirming the ability of VAS971
to provide protection against the damaging effects of I/R injury was presented
at the VIIth Annual Scientific Meeting of La Societe Quebecoise d'hypertension
arterielle, held in Quebec City in January, 1999. The results presented were
based on studies carried out by Dr. Huifang Chen of the Research Centre of the
University of Montreal ("CHUM") in a standard large animal model of I/R-induced
kidney failure. Dr. Chen's findings confirmed earlier studies performed by Dr.
Johanne Tremblay of CHUM, described below, which were presented at the Third
International Congress of Pathophysiology, Lahti, Finland, in June 1998.
Dr. Chen's research focused on the effect of VAS971 on the mechanism of
protection against cell death, the ultimate result of I/R injury. It is now
known that impaired function of the mitochondria, the structures on which cells
depend for energy and survival, is a sign of impending apoptosis, a common form
of cell death. The results of these new studies demonstrate that VAS971 improves
the retention of mitochondrial integrity subsequent to ischemic damage, thus
enhancing cell survival after I/R injury.
In Dr. Chen's studies, animals were given a course of either VAS971 or
placebo, followed by surgical removal of one kidney. The blood supply to the
remaining kidney was clamped for 60 minutes and then released, re-establishing
blood flow, thereby simulating the I/R injury that occurs during major vascular
surgery. Recovery of kidney function following I/R injury was monitored daily by
measurement of serum creatinine levels. In addition, mitochondrial membrane
potential ("MMP") was measured in kidney tubule cells at the conclusion of the
experiment. Reduction in MMP is one of the earliest indications of impaired
mitochondrial function and impending cell death.
The results showed that the degree of kidney damage following I/R
injury, as reflected by elevation of serum creatinine levels, was significantly
less in the VAS971-treated group. The average daily creatinine levels over the
six-day observation period were 45% lower in the VAS971-treated group, compared
to the placebo group (p=0.0325). Following I/R injury, MMP was fully maintained
and significantly higher in the kidneys of the VAS971-treated group compared to
the placebo group, a difference of 48% (p=0.006).
During 1997, a research team led by Dr. Johanne Tremblay of CHUM,
demonstrated that VAS971 reduces several responses to stress in an animal model
of human essential hypertension. Experiments showed that VAS971 resulted in a
significant improvement in the response to psychological stress as measured by
reductions in stress-induced increases in diastolic blood pressure, heart rate,
and body temperature (p < 0.0001 in each case). It was also shown that following
surgery for implantation of telemetry monitors, elevated body temperature
returned to normal significantly more rapidly in the VAS971-treated group (p <
0.002).
<PAGE>
Vasogen is currently preparing regulatory submissions to begin clinical
studies of VAS971 in North America. The Company is initially developing VAS971
to prevent the serious complications resulting from I/R injury during major
vascular surgery, such as TAA repair. Success in the TAA repair indication could
also lead to the commercial development of VAS971 for other major vascular
surgery, including abdominal aortic aneurysm repair and coronary artery bypass
graft surgery, where the incidence of I/R related injury is significant. Based
on current plans, the Company anticipates having sufficient data concerning
VAS971 to conclude a strategic alliance within 18 months.
VAS972 and Autoimmune disease
VAS972 is being developed for the treatment of autoimmune disease.
Autoimmune diseases affect over 40 million people throughout the world. Many
autoimmune diseases are characterized by an imbalance between the different
types of Tcells, the pro-inflammatory Th1 cells and the regulatory Th2 type of
cells. In certain autoimmune diseases, including rheumatoid arthritis,
scleroderma and psoriasis, there is a relative increase in Th1 cells. The
Company is focusing development of VAS972 on Th1-driven autoimmune diseases,
particularly rheumatoid arthritis and psoriasis.
Rheumatoid arthritis (RA) is a progressive and destructive autoimmune
disease in which the body's immune system attacks the joints. The prevalence of
RA is estimated to be 1 percent of the population over the age of 16 years, with
a total prevalence in Europe and North America of approximately 5.4 million
people (Jacobsen et al. Epidemiology and estimated population burden of selected
autoimmune diseases in the United States. 1997 Clinical Immunology and
Immunopathology. 84(3): 223-243). As the disease progresses, chronic
inflammation irreversibly erodes cartilage, bone, the articular capsule, and
ligaments, resulting in swelling, pain, and eventual destruction of the joint.
Progression of damage can lead to profound disability, chronic pain, and an
increased risk of premature death. The economic impact of RA is significant with
annual direct medical costs per RA patient ranging from $US 3,300-$US 3,800
(Gabriel et al. 1997. Direct medical costs unique to people with rheumatoid
arthritis, 1997 Journal of Rheumatology 24: 719-725).
Psoriasis is believed to be a Th1-driven autoimmune disease. This
chronic disease affects the skin and is characterized by scaling and
inflammation. Scaling occurs when cells in the outer layer of skin reproduce
faster than normal and pile up on the skin's surface. People with psoriasis may
suffer discomfort, restricted motion of joints, and emotional distress.
Psoriasis affects an estimated two percent of the population, or more than ten
million people in North America and Europe. Approximately five to ten percent of
people with psoriasis develop psoriatic arthritis, a joint inflammation that
produces symptoms of arthritis. Annual treatment costs for psoriasis patients
are estimated to aggregate $US 1.6 to 3.2 billion dollars in the United States
(American Autoimmune Related Diseases Association Inc. website - www.aarda.org,
National Psoriasis Foundation website - www.psoriasis.org).
During 1997, preliminary clinical studies at the University of Toronto
on patients with the autoimmune disease scleroderma indicated a significant (p <
0.05) reduction in the proportion of Th1 to Th2 Tcells in the blood following
treatment with VAS972. This research provided initial evidence indicating how
VAS972 may modulate the immune system and suggests the potential of the therapy
for the treatment of inflammatory and autoimmune conditions. This work is being
extended by investigating the effects of VAS972 on autoimmune disease processes
and immune/endothelial cell interactions.
<PAGE>
Vasogen believes that the increase in the proportion of Th2 cells to
Th1 cells observed following the administration of VAS972 in patients with the
autoimmune disease scleroderma suggest that the therapy leads to the production
of inhibitory cytokines and to a down-regulation or inhibition of the
autoreactive immune responses. The potential ability of VAS972 to down-regulate
or inhibit these destructive processes could provide significant long-term
therapeutic benefit in patients with autoimmune disease. Based on these
findings, the Company is conducting a series of pre-clinical studies in models
of autoimmune disease at the University of Toronto. Based on current plans, the
Company anticipates having sufficient data concerning VAS972 to conclude a
strategic alliance within 24 months.
VAS981 and Graft-versus-Host Disease
VAS981 is being developed for treating bone marrow prior to
transplantation to prevent Graft -versus-Host Disease, a life-threatening
complication of bone marrow transplantation. During curative treatment for
malignancies of the blood, such as leukemia, patients undergo high doses of
chemotherapy or radiotherapy, which severely damages the bone marrow. Bone
marrow can be replaced through a procedure known as bone marrow transplantation.
GvHD is a life-threatening complication of bone marrow transplantation ("BMT").
It occurs when Tcells in the donated marrow (graft) identify cells of the
recipient's body (host) as foreign and attack them. The disease is characterized
by gastrointestinal involvement manifested by loss of appetite, nausea,
vomiting, diarrhea, abdominal pain and mal-absorption and/or liver dysfunction.
The ability to treat the bone marrow graft, to prevent GvHD would have
major beneficial implications for the treatment of a number of forms of cancer
by increasing the number of patients who would become candidates for life saving
BMTs. The economic impact of GvHD is also significant. Charges for allogeneic
BMT (11,000 procedures per annum) range from $US 50,000 to $US 300,000, with
treatments for associated GvHD complications averaging $US 40,000 per affected
patient (Weeks et al. The true cost of bone marrow transplantation. (1997
American Journal of the Medical Sciences 314(2): 101-112). Unless a genetically
identical donor can be found, bone marrow transplantation is accompanied by
GvHD, whereby lymphocytes present in the bone marrow graft attack the tissues of
the immunologically incompatible patient.
Vasogen is developing VAS981 for patients with malignancies, who could
potentially be treated with a bone marrow transplant. The therapy is anticipated
to decrease the severity and incidence of GvHD and provide a clinically
effective process to allow a parent or sibling to donate bone marrow. This
latter benefit could result in a significant increase in the potential number of
bone marrow transplants.
The Company is currently conducting pre-clinical studies in GvHD at the
Ontario Cancer Institute and the Sunnybrook Health Science Centre, University of
Toronto under the direction of Dr. David Spaner, using experimental animal
systems, which introduce incompatible bone marrow stem cells into unrelated
hosts. Based on the initial results of this work, the Company filed a Canadian
patent application pertaining to methods of alleviating GvHD. Based on current
plans, the Company anticipates having sufficient data concerning VAS981 to
conclude a strategic alliance within 18 months.
<PAGE>
Competitive Environment
The pharmaceutical, medical device, and biotechnology industries are
characterized by rapidly evolving technology and intense competition. Many
companies, including major pharmaceutical, as well as specialized biotechnology
companies, are engaged in activities focused on similar medical conditions as
those targeted by the Company. Many of these companies have substantially
greater financial and other resources, larger research and development staff and
more extensive marketing and manufacturing organizations than the Company. Many
of these companies have significant experience in pre-clinical testing, human
clinical trials, product manufacturing, marketing and distribution and other
regulatory approval procedures. In addition, colleges, universities, government
agencies and other public and private research organizations conduct research
and may market commercial products on their own or through joint ventures. These
institutions are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed. These institutions also compete with the Company in recruiting and
retaining highly qualified scientific personnel.
Intellectual Property
Because of the substantial length of time and expense associated with
developing new products, the pharmaceutical, medical device and biotechnology
industries place considerable importance on obtaining patent protection for new
technologies, products and processes. The Company's policy is to file patent
applications to protect inventions, technology and improvements that are
important to the development of its business and with respect to the application
of its therapies to the treatment of a number of disease indications. The
Company seeks patent protection in various commercial jurisdictions of the
world; for example, the Company currently has four issued patents and eight
patent applications pending. The issued U.S. patents relate to a device for
processing blood (1990), an ozone generator (1996), a method for inhibiting the
aggregation of blood platelets (1997) and a method of increasing the
concentration of nitric oxide in a human (1998). The pending patent applications
mainly relate to the application of specific physicochemical stress factors in
connection with a variety of disease indications, including a method of lowering
blood lipids, treatment of autoimmune disease, stress treatment and
pre-conditioning against stress, improvement in endothelium function, and GvHD.
The Company will continue to seek intellectual property protection for its
technology as appropriate.
The Company requires its employees, consultants, members of the
Scientific Advisory Board, outside scientific collaborators and sponsored
researchers to enter into confidentiality agreements with the Company that
contain assignment of invention clauses. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed except in specific circumstances.
Manufacturing
The Company's medical device technology for the production and delivery
of immune modulation therapies and for the processing of bone marrow are
designed and manufactured under the Company's quality system, which is
registered to ISO 9001 and EN 46001. These quality system registrations are
necessary to support regulatory approvals (see "Government Regulation"). For
entry into the U.S. market, the Company's quality system is being modified as
necessary to conform to the current Good Manufacturing Practices (cGMP) and
other regulatory requirements (see "Government Regulation").
<PAGE>
The manufacture of the Company's medical device technology is currently
subcontracted to suppliers and managed by Vasogen. The technology consists of a
medical device system that is designed to apply a number of physicochemical
stress factors to a sample of a patient's own blood. The system employs a
single-use disposable vessel, which contains the patient's blood during
processing. Vasogen currently relies upon a single subcontractor for the
disposable blood containers and a single subcontractor for the medical device
system. Both subcontractors operate quality systems in accordance with ISO
9001/EN 46001 requirements. In addition, the Company's subcontractor for
disposable blood containers executes all critical assembly operations in
controlled environment rooms in which bacterial and airborne particulate levels
are monitored and meet regulatory requirements.
Human Resources
At April 5, 1999, the Company had seventeen full time employees and four
part-time employees. As the Company encourages share ownership, it has
established an option plan (see "Item 12. Compensation - Stock Option Plan") to
attract, motivate and retain key employees and consultants. The Company's
employees are not governed by a collective agreement. The Company believes that
its employee relations are excellent.
REGULATION
The Company's therapies are produced by a medical device utilizing a
sample of the patient's own blood. The production of these therapies involves
the removal from the patient of a small quantity of blood, the processing of the
blood by applying physicochemical stress factors to it, and the
re-administration of the processed autologous blood to the same patient. Sales
of medical products and therapies are subject to stringent regulatory
requirements in most countries. The regulatory review process required for
commercial sales varies from country to country. In certain countries, the
Company may also be subject to regulations governing clinical studies of its
products. The Company pursues pre-market approvals and complies with clinical
study requirements in those jurisdictions, namely Europe, the United States, and
Canada, where activities are being planned or are conducted by or on behalf of
the Company. The Company cannot predict or give any assurances as to whether
further regulatory approvals will be received or how long the process of seeking
approval will take.
Europe
Medical products that are placed on the market in the European Union
(EU) are currently subject to one of two mutually-exclusive regulatory regimes:
either the Medical Devices Directive (MDD), Council Directive 93/42/EEC, for
medical devices; or the Medicinal Products Directive (MPD), Council Directive
65/65/EEC for pharmaceutical products. The Company's technology for the
production and delivery of VasoCare(TM) therapy has been classified as medical
devices in the EU.
Generally, in order to sell its medical device products within the
European Union, Norway and Switzerland, the Company is required to achieve
compliance with the requirements of the MDD and affix CE Marking on its medical
device products to attest to such compliance. To achieve compliance, the
Company's medical device products must meet the "essential requirements" of the
MDD relating to safety and performance and the Company must successfully undergo
verification of its regulatory compliance ("conformity assessment") by a
qualified third party (a "Notified Body") selected by the Company. The Company
was granted CE Marking certification for Vasogen's technology for the production
and delivery of VasoCare(TM) therapy and Vasogen's quality system was registered
to ISO 9001:1994 and BS EN 46001:1997 on February 3, 1998.
<PAGE>
As the MDD is applied through enactment of national legislation of
European Union member states, the Company must comply with a variety of
different legislative requirements in each country in which Vasogen plans to
sell its products, such as use of certain languages for labelling, notification
and assessment procedures for clinical trials, and notification to authorities
prior to entry of the product into the market. At this time, the review
conducted by the Notified Body and the subsequent CE Marking of the Company's
technology for the production and delivery of VasoCare(TM) therapy are both
necessary and sufficient to place the devices on the market in all states of the
European Union, Norway and Switzerland. Except in cases of ethical or public
health concerns, or in the case of procedures shown to have significant adverse
effects once on the market, the relevant authorities in each country do not
usually involve themselves directly in the market approval/disapproval of
medical procedures based on medical devices, however, there can be no assurance
that this situation may not change in the future.
The Company is subject to continued audit by its Notified Body and will
be required to report any serious adverse incidents or near incidents to the
appropriate authorities.
United States
In the United States, the Company's technology is expected to be
subject to regulation by the health authorities as medical devices; however,
this product classification is not yet finalized. The manufacture and sale of
medical devices in the United States are controlled by the Food and Drug
Administration (FDA). The Company is subject to the regulation of the FDA, as
well as state and local authorities. It is expected that the Company's medical
devices will be subject to the FDA's Pre-Market Approval (PMA) process prior to
marketing in the United States. The PMA approval process is a multi-step process
that requires the Company to submit to the FDA scientifically valid pre-clinical
and clinical data which it has developed to demonstrate the safety and
effectiveness of the device for the stated medical indications or uses.
The clinical studies to generate the clinical data for the PMA are
subject to regulation under the investigational device exemption ("IDE")
regulations. Before the clinical study(ies) of the Company's device can begin,
an IDE application must be submitted to the FDA and be approved. Also, before
the studies can begin, the institutional review boards at the respective
clinical centres participating in the studies must approve the clinical
protocol.
Toward the end of the PMA review process, the FDA will conduct an
inspection of the manufacturer's facilities to ensure that the device design and
manufacture are in compliance with applicable quality system regulation ("QSR")
requirements. The QSR requirements mandate that the Company manufacture its
devices and maintain its documents in a prescribed manner with respect to
design, manufacturing, testing, and control activities. If the FDA evaluations
of both the PMA application and the manufacturing facilities are favorable, the
FDA may issue an approvable letter, which usually contains a number of
conditions which must be met in order to secure final approval of the PMA. When
those conditions have been fulfilled to the satisfaction of the FDA, the agency
will issue a PMA approval order, authorizing commercial marketing of the device
for stated indications. The FDA also has the authority to impose certain
post-approval requirements in the PMA approval order. FDA approval can be
withdrawn for failure to comply with any post-approval requirements or for other
reasons, such as the discovery of significant adverse effects.
<PAGE>
Canada
In Canada, the Company's technology is expected to be subject to
regulation by the health authorities as medical devices; however, this product
classification is not yet finalized. The Medical Devices Bureau ("MDB") controls
the manufacture and sale of medical devices in Canada. In their basic
requirements, the regulations of Canada are similar to those of the United
States and require that clinical studies be conducted to demonstrate the safety
and effectiveness of devices prior to marketing. As well, there must be
documented evidence that the devices are developed, manufactured and produced
under current quality system regulations and guidelines in order to ensure the
quality of the product made available for sale. Approval of such therapy and
technology is a multi-step process and the Company is prohibited from promoting
or commercializing its products prior to regulatory approval. For any
investigation and testing of the Company's products in Canada on humans,
authorization by the MDB is required.
The Company must manufacture the device under approved quality system
conditions and must validate the performance characteristics of the device to
ensure that the device performs safely, consistently and reliably.
In addition to the regulatory product approval framework, the Company
is also subject to regulation under municipal, provincial, and federal laws,
including requirements regarding occupational safety, laboratory practices, the
use, handling and disposition of biological waste, environmental protection and
hazardous substance control, and may be subject to other present and future
local, provincial, state, federal and foreign regulation, including future
regulation of the biotechnology industry. The Company believes it is in
compliance with all such existing regulations.
Summary
The Company's regulatory affairs advisors and product development team
has extensive experience with, and understands the European and North American
regulatory requirements. They are continuing to develop the VasoCare(TM) device
and disposable technologies in compliance with all such requirements.
RISK FACTORS AFFECTING THE COMPANY
The business of the Company entails significant risks, and an
investment in the Common Shares should be considered highly speculative for a
variety of reasons. An investment in Common Shares should only be undertaken by
persons who have sufficient financial resources to enable them to assume such
risks. In addition to the usual risks associated with investment in a business,
the following is a general description of certain significant risk factors,
which should be considered.
(a) Regulatory Environment
Biotechnology, medical device, and pharmaceutical companies
historically operate in a high-risk regulatory environment. The FDA and other
health agencies can be very slow to approve a product and can also withhold
product approvals. In addition, these health agencies also oversee many other
Company operations, such as manufacturing. As a result, regulatory risk is
normally higher than other industry sectors.
<PAGE>
The Company has incurred, and expects to continue to incur, substantial
clinical research and other costs in connection with obtaining regulatory
approvals for its medical products in Canada, the United States, Europe and
other jurisdictions. While the Company is not aware of any pending or threatened
governmental action against it in any country, any enforcement action by
regulatory authorities with respect to past or any future regulatory
non-compliance could have a material adverse effect on the Company's business,
financial condition and results of operations.
There can be no assurance that the Company will be able to achieve or
maintain regulatory compliance on all or any of its current or future products
or that it will be able to timely and profitably produce its products while
complying with applicable regulatory requirements. Failure to achieve or
maintain such compliance could have a material adverse effect upon the Company's
business, financial condition, and results of operations.
Certain regulatory authorities can institute proceedings to detain or
seize products, issue a recall, enjoin future violations, assess civil and
criminal penalties against the Company, its officers and its employees, or
require the Company to make substantial changes to its manufacturing operations.
Any of such actions could have a material adverse effect on the Company's
business, financial condition and results of operations.
While the Company believes it is in compliance with all existing
regulations, there can be no assurance that a violation of such laws will not
occur, or that any such violations will not have a material adverse effect on
the Company's business, financial condition or results of operations.
(b) Government Reduction in Health Care Expenditures
Almost all medical devices are subject to the reduction in health care
expenditures in most countries. However, those devices which reduce overall
health care costs will benefit by being adopted by the health care industry. The
Company's products are expected to be such devices.
(c) Potential Competition
The biotechnology industry continues to undergo rapid change and
competition is intense and is expected to increase. There can be no assurance
that competitors have not or will not succeed in developing technologies and
products that are more effective than any which have been or are being developed
by the Company or which would render the Company's technology and products
obsolete and noncompetitive. Many of the Company's competitors have
substantially greater experience, financial and technical resources and
production, marketing and development capabilities than the Company.
Accordingly, certain of the Company's competitors may succeed in obtaining
regulatory approval for products more rapidly or effectively than the Company.
If the Company commences commercial sales of its products, it will also be
competing with respect to manufacturing efficiency and sales and marketing
capabilities, areas in which it currently has no experience.
<PAGE>
(d) Development Stage
Vasogen's products are in the development stage and, accordingly,
Vasogen's business operations are subject to all of the risks inherent in the
establishment and maintenance of a developing business enterprise, such as
competition and viable operations management. Due to its initial investment in
extensive research and development and clinical testing, Vasogen has incurred a
loss and has received no cash flow from operations to date, and there is no
assurance that it will have earnings or cash flow from operations in the future.
The future earnings and cash flow from operations of Vasogen are dependent, in
part, on its ability to further develop its products. There can be no assurances
that Vasogen will grow and be profitable. The operations of Vasogen are
presently funded by external financing and if sufficient cash flow from
operations or earnings is not generated in the future, additional financing will
be required. There is no assurance that such financing will be available.
(e) Product Concentration
Vasogen intends to rely substantially on the exploitation of its
products that are currently in development for its future earnings. If any of
these products do not become commercially saleable for whatever reason,
Vasogen's future earnings will suffer. If the products become commercially
suitable, Vasogen's future financial performance will then depend on the
successful introduction and customer acceptance of its products.
(f) Proprietary Technology
Vasogen owns all of its key technologies. However, as the
development of its products continues and increases, the potential uses of its
products may overlap with other products and as a result, may increasingly
become subject to claims of infringement. To date, Vasogen is unaware of
infringement claims made or being made against it or of any such products. As
Vasogen continues the development of its products, there can be no assurance
that third parties will not assert infringement claims against Vasogen in the
future, or require Vasogen to obtain a license for the intellectual property
right of third parties. There can be no assurance that such licenses, if
required, will be available on reasonable terms, or at all.
The Company's success will depend in part on its ability to obtain
patent protection for its product candidates. The patent positions of
pharmaceutical and biotechnology industry are uncertain and involve complex
legal and factual questions. Moreover, the coverage claimed in patent
applications can be significantly reduced before the patent is issued.
Consequently, the Company does not know whether any of its patent applications
will result in the issuance of patents or, if any patents are issued, whether
they will provide significant protection or will be circumvented or invalidated.
Since patent applications in the United States are maintained in secrecy until
patents issue and since publication of discoveries in the scientific and patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first creator of inventions covered by its pending patent
applications or that it was the first to file patent application for such
inventions. There can be no assurance that the Company's patents, if issued,
would be held to be valid by a court of competent jurisdiction. An 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 using such technology.
<PAGE>
(g) Scientific Research and Product Risk
Definitive proof of the precise mechanism of action of a
biological response modifier such as immune modulation therapy will require
considerably more basic scientific research than has been accomplished to date.
With the exception of certain patient trials, results from clinical trials have
not yet been obtained and the impact of immune modulation therapy in the
treatment of these conditions has not yet been addressed. There can be no
assurances that the products, which Vasogen is currently developing, will be
approved by regulatory agencies or that further testing will yield positive
results. Should the product prove to have no benefit and/or have an unsafe
profile, its development will likely be discontinued. Evidence to date, however,
suggests that the products are both efficacious and very safe.
(h) Key Personnel
The operations of the Company are highly dependent upon the
participation of its key personnel. The loss of the service of any one of the
key personnel may materially affect the ability of the Company to grow and
expand. The Company carries $1 million of keyman insurance on Dr. Anthony
Bolton, Director of Research.
(i) Financing
The Company may need to raise additional funds to conduct research and
development, pre-clinical studies and clinical trials necessary to bring its
potential products to market and establish manufacturing and marketing
capabilities. The Company's future capital requirements will depend on many
factors, including continued scientific progress in its research and development
programs, the scope and results of preclinical studies and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting and enforcing patent claims, competing technological and
market developments, the cost of manufacturing scale-up, effective
commercialization activities and arrangements and other factors not within the
Company's control.
Adequate funds may not be available when needed or on terms
acceptable to the Company. Insufficient funds may require the Company to scale
back or eliminate some or all of its research and development programs or
license to third parties products or technologies that the Company would
otherwise seek to develop itself. The Company anticipates that its existing
resources will enable the Company to maintain its current and planned operations
through fiscal 2000.
(j) Manufacturing
Vasogen currently relies upon a single subcontractor for the disposable
blood containers and a single subcontractor for the medical instruments on which
its immune modulation therapy delivery systems are based. The Company is
continually reviewing its own capabilities and the capabilities of other
potential suppliers and subcontractors. The establishment of additional or
replacement suppliers for certain materials, components, subassemblies,
assemblies, or finished products cannot be accomplished quickly, largely due to
the regulatory approval systems and the complex nature of manufacturing
processes employed by many suppliers. The failure to obtain sufficient
quantities of component materials on commercially reasonable terms could have a
material adverse effect on the Company's business, financial condition and
results of operations.
<PAGE>
There can be no assurance that the Company will be successful in
scaling up its manufacturing operations or that it will not experience
manufacturing difficulties or recalls or safety alerts in the future. Potential
difficulties experienced by the Company in manufacturing scale-up, including
recalls or safety alerts, could have a material adverse effect on the Company's
business, financial condition and results of operations.
(k) Year 2000 Compliance
Year 2000 computer risks arise from the practice of some computer
software using only two digits rather than four to indicate the year portion of
the date. On January 1, 2000, this software will change the year from "99" to
"00" and may react as if it is the year 1900. Such reaction could theoretically
disable or impair the performance of computer software.
The Year 2000 issue creates risks for the Company from unforeseen
problems that may occur in its own computer systems, as well as in those of
third parties with whom the Company interacts. The Company has established an
internal task force led by senior management to deal with the Year 2000 issue.
The Company has undertaken a review of its internal computer systems to assess
the risk of a material effect on the Company's financial condition or results of
operations as a result of the Year 2000 issue.
Although the Company does not believe there are any material
operational issues or costs associated with preparing its internal systems for
Year 2000 compliance, there can be no assurances that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems, as well as in those of third parties with whom the Company interacts.
(l) Dilution
As a business having no sales or revenues, Management anticipates that the
Company will be dependant over the foreseeable future upon securing additional
financing, of which there can be no assurance. In order to obtain additional
financing, if it is even available, it is likely that the Company will sell
additional shares or financial instruments, which are exchangeable or
convertible into shares, resulting in substantial dilution to all shareholders.
In order to provide incentives to current employees and induce prospective
employees and consultants to work for the Company, the Company has granted
options and intends to offer and issue options to purchase shares and/or rights,
exchangeable or convertible into shares; the exercise of such options and/or
conversion of such other rights exchangeable or convertible into shares could
result in substantial dilution to all shareholders.
(m) Uncertainty of Product Development and Clinical Testing
The Company has not completed the development of any products and there
can be no assurance any products will be successfully developed. The Company's
immune modulation therapies will require significant additional research and
development efforts and regulatory approvals, including clinical trials, prior
to potential commercialization in the United States and elsewhere. However,
there can be no assurance that the results of all required clinical trials will
demonstrate that these immune modulation therapies are safe and efficacious or,
that even if the results of the clinical trials are considered successful by the
Company, that the FDA will not require the Company to conduct additional large
scale clinical trials with these immune modulation therapies before the FDA will
consider approving therapies for commercial sale.
<PAGE>
Failure of these trials to demonstrate the safety and effectiveness of
these immune modulation therapies could have a material adverse effect on the
regulatory approval process for this potential product. There can be no
assurance that the results of the Company's preclinical studies and clinical
trials will be indicative of future clinical trial results. A commitment of
substantial resources to conduct time consuming research, preclinical studies
and clinical trials will be required if the Company is to complete development
of its products. Delays in planned patient enrollment in the Company's current
clinical trials or future clinical trials may result in increased costs, program
delays or both. There can be no assurance that any of the Company's potential
products will prove to be safe and effective in clinical trials, that FDA or
other regulatory approvals will be obtained or that such products will achieve
market acceptance.
Any products resulting from these programs are not expected to be
successfully developed or commercially available in the United States for a
number of years, if at all. There can be no assurance that unacceptable
toxicities or side effects will not occur at any time in the course of human
clinical trials or, if any products are successfully developed and approved for
marketing, during commercial use of the Company's products. The appearance of
any such unacceptable toxicities or side effects could interrupt, limit, delay
or abort the development of any of the Company's products or, if previously
approved, necessitate their withdrawal from the market. Furthermore, there can
be no assurance that disease resistance will not limit the efficacy of potential
products.
(n) Potential Conflicts of Interests
Certain of the directors and officers of the Company are also directors
and officers of other companies. Consequently, there exists the possibility for
such directors and officers to be in a position of conflict. Any decision made
by any of such directors and officers involving the Company are made in
accordance with their duties and obligations to deal fairly and in good faith
with the Company and such other companies. In addition, each of the directors of
the Company will declare a conflict in, and refrain from voting on, any matter
in which such director may have a conflict of interest. Reference is made to
"Item 13. Interest of Management in Certain Transactions."
(o) History of Operating Losses
As of November 30, 1998, the Company had an accumulated deficit of
approximately $29.54 million. The Company has not generated revenues from the
commercialization of any products and expects to incur substantial net operating
losses over the next several years. There can be no assurance that the Company
will be able to generate sufficient product revenue to become profitable at all
or on a sustained basis. The Company expects to have quarter to quarter
fluctuations in expenses, some of, which could be significant, due to expanded
research, development and clinical trial activities.
<PAGE>
(p) Patents and Proprietary Technology
The Company has filed a number of patent applications in the United
States and many international countries. The Company files applications as
appropriate for patents covering its products and processes. The Company has
been issued patents covering certain aspects of its immune modulation therapies.
The Company's success may depend in part on its ability to obtain patent
protection for its products and processes. There can be no assurance that the
Company's patent applications will be issued as patents or that any of its
issued patents, or any patent that may be issued in the future, will provide the
Company with adequate protection for the covered products, processes or
technology. The patent positions of biotechnology and pharmaceutical companies
can be highly uncertain, and involve complex legal and factual questions.
Therefore, the breadth of claims allowed in biotechnology and pharmaceutical
patents cannot be predicted. The Company also relies upon unpatented trade
secrets and know how, and no assurance can be given that others will not
independently develop substantially equivalent trade secrets or know how. In
addition, whether or not the Company's patents are issued, or issued with
limited coverage, others may receive patents, which contain claims applicable to
the Company's product. There can be no assurance that any of the Company's
patents, or any patents issued to the Company in the future, will afford
meaningful protection against competitors. Defending any such patent could be
costly to the Company, and there can be no assurance that the patent would
beheld valid by a court of competent jurisdiction.
The Company also relies on protecting its proprietary technology in
part through confidentiality agreements with its corporate collaborators,
employees, consultants and certain contractors. 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 will not otherwise
become known or independently discovered by its competitors. It is possible that
the Company's products or processes will infringe, or will be found to infringe,
patents not owned or controlled by the Company. If any relevant claims of third
party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses or redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available at
all or on terms commercially reasonable to the Company or that the Company could
redesign its products or processes to avoid infringement. Litigation may be
necessary to defend against claims of infringement, to enforce patents issued to
the Company or to protect trade secrets. Such litigation could result in
substantial costs and diversion of management efforts regardless of the results
of such litigation and an adverse result could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
or require the Company to cease using such technology.
(q) Dependence on Third Parties
The Company's strategy for the research, development and
commercialization of its products requires entering into various arrangements
with corporate collaborators, licensors, licensees and others, and the Company's
commercial success is dependent upon these outside parties performing their
respective contractual responsibilities. The amount and timing of resources such
third parties will devote to these activities may not be within the control of
the Company. There can be no assurance that such parties will perform their
obligations as expected or that the Company will derive any revenue from such
arrangements. There can be no assurance that these collaborations will result in
the development of any commercial products. The Company intends to seek
additional collaborative arrangements to develop and commercialize certain of
its products. There can be no assurance that the Company will be able to
negotiate collaborative arrangements on favorable terms, or at all, in the
future, or that its current or future collaborative arrangements will be
successful.
<PAGE>
(r) Lack of Commercial Manufacturing and Marketing Experience
If the Company is successful in developing the markets for immune
modulation therapies, the Company would have to arrange for the manufacture of
its devices. At the present time, the Company has not arranged for the
manufacture of these treatment medical devices on a large scale. There can no
assurance that the Company, on a timely basis, will be able to make the
transition from manufacturing clinical trial quantities to commercial production
quantities successfully or be able to arrange for contract manufacturing. The
Company believes it will be able to manufacture its medical devices for initial
commercialization, if the product obtains FDA approval, but it has not yet
demonstrated the capability to manufacture the treatment devices in commercial
quantities.
The Company has no experience in the sales, marketing and distribution
of pharmaceutical or medical products. There can be no assurance that the
Company will be able to establish sales, marketing and distribution capabilities
or make arrangements with its collaborators, licensees or others to perform such
activities or that such efforts will be successful. The manufacture of the
Company's products involves a number of steps and requires compliance with
stringent quality control specifications imposed by the Company itself and by
the FDA. Moreover, the Company's products can only be manufactured in a facility
that has undergone a satisfactory inspection by the FDA. For these reasons, the
Company would not be able quickly to replace its manufacturing capacity if it
were unable to use its manufacturing facilities as a result of a fire, natural
disaster (including an earthquake), equipment failure or other difficulty, or if
such facilities are deemed not in compliance with the FDA's drug GMP
requirements and the non-compliance could not be rapidly rectified. The
Company's inability or reduced capacity to manufacture its products would have a
material adverse effect on the Company's business and results of operations.
The Company may enter into arrangements with contract manufacturing
companies to expand its own production capacity in order to meet requirements
for its products, or to attempt to improve manufacturing efficiency. If the
Company chooses to contract for manufacturing services and encounters delays or
difficulties in establishing relationships with manufacturers to produce,
package and distribute its finished products, clinical trials, market
introduction and subsequent sales of such products would be adversely affected.
Further, contract manufacturers must also operate in compliance with the FDA's
drug GMP requirements; failure to do so could result in, among other things, the
disruption of product supplies. Until recently, biologic product licenses could
not be held by any company unless it performed significant manufacturing
operations. The FDA recently amended its regulations in this regard, and the
Company believes that under these new regulations it can now hold licenses for
its biological products without performing significant manufacturing steps.
Nonetheless, the Company's potential dependence upon third parties for the
manufacture of its products may adversely affect the Company's profit margins
and its ability to develop and deliver such products on a timely and competitive
basis.
(s) Uncertainty of Product Pricing, Reimbursement and Related Matters
The Company's ability to earn sufficient returns on its products will
depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health coverage insurers, managed care
organizations and other organizations. Third party payors are increasingly
challenging the price of medical products and services. If purchasers or users
of the Company's products are not able to obtain adequate reimbursement for the
cost of using such products, they may forego or reduce such use. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and there can be no assurance that adequate third party coverage will
be available.
<PAGE>
(t) Product Liability Exposure
The Company faces an inherent business risk of exposure to product
liability and other claims in the event that the development or use of its
technology or prospective products is alleged to have resulted in adverse
effects. While the Company has taken, and will continue to take, what it
believes are appropriate precautions, there can be no assurance that it will
avoid significant liability exposure. Although the Company currently carries
product liability insurance for clinical trials, there can be no assurance that
the Company has sufficient coverage, or can obtain sufficient coverage, at a
reasonable cost. An inability to obtain product liability insurance at
acceptable cost or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
the Company. A product liability claim could have a material adverse effect on
the Company's business, financial condition and results of operations.
(u) Hazardous Material; Environmental Matters
Although the Company does not currently manufacture commercial
quantities of its products, it produces limited quantities of such products for
its clinical trials. The Company's research and development processes involve
the controlled storage, use and disposal of hazardous materials, and biological
hazardous materials. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
There can be no assurance that the Company will not be required to incur
significant costs to comply with current or future environmental laws and
regulations nor that the operations, business or assets of the Company will not
be materially or adversely affected by current or future environmental laws or
regulations.
(v) Volatility of Stock Price and Absence of Dividends
The market price of the Company's Shares, like that of the common stock
of many other biopharmaceutical companies in the development stages, has been
and is likely to be highly volatile. Factors such as the results of preclinical
studies and clinical trials by the Company, its collaborators or its
competitors, other evidence of the safety or efficacy of products of the Company
or its competitors, announcements of technological innovations or new products
by the Company or its competitors, governmental regulatory actions, developments
with the Company's collaborators, developments concerning patent or other
proprietary rights of the Company or its competitors (including litigation),
concern as to the safety of the Company's products, period-to-period
fluctuations in the Company's operating results, changes in estimates of the
Company's performance by securities analysts, market conditions for
biopharmaceutical stocks in general and other factors not within the control of
the Company could have a significant adverse impact on the market price of the
Common Stock. The Company has never paid cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the foreseeable future.
<PAGE>
GLOSSARY
Following is a glossary of terms used throughout this Annual Report.
AAA Abdominal Aortic Aneurysm, meaning a balloon-like dilatation
of the abdominal aorta (main artery).
Arterial Blood Rate of blood flow through arteries.
Flow
Atherosclerosis: Deposits of fat (cholesterol) in the walls of
arteries--causes obstruction and/or thrombosis.
Autoimmune: A reaction of the body's immune cells against its own cells.
Balloon Dilation of a narrowed coronary artery by an expandable
Angioplasty balloon.
Blood Lipids An alternate term for blood fats.
Claudication: Muscle pain on exercise, due to lack of oxygen.
CABG Coronary Artery Bypass Graft, meaning a venous or synthetic
graft which bypasses a blocked coronary artery.
Cytokines Intercellular messengers produced by cells which are
involved in many body functions particularly in how the
immune system is run.
Endothelium: The thin cellular lining of blood vessels which plays a key
role in regulating blood flow by secreting vasoconstrictor
and vasodilator substance
Endothelial Cells A thin layer of cells that lines the blood vessels and is
very important in controlling blood flow and blood clotting.
Endothelial Failure of the endothelium to perform its normal function.
Dysfunction:
In Vitro Describes tests done outside the body i.e. as in a test
tube.
HLA-DR A cell receptor involved in antigen presentation to T cells,
also a type of cell marker important in transplantation
immunity.
LDL Cholesterol A form of cholesterol that is harmful because it can easily
penetrate the endothelial lining ,and form the fatty
deposits of atherosclerosis.
Leukocytes: White blood cells.
Nitric Oxide: A gas which causes smooth muscle fibers to relax, i.e. in
blood vessels; has many other functions in the body.
Platelets: Small cells in the blood required for blood clotting.
Prostacyclin: Causes relaxation of smooth muscle cells causing
vasodilation.
<PAGE>
Raynaud's Disease: Excessive constriction of digital blood vessels on exposure
to cold, leading to pain and numbness.
Rheumatoid An autoimmune disease, which causes arthritis (joint
Arthritis: inflammation) in many different joints.
Scleroderma: An Autoimmune disease which causes hardening and thickening
of the skin and blood vessels; may affect internal organs.
Serum Creatinine A measure of kidney function.
levels
T cell A type of lymphocyte which constitutes the attack arm of the
immune system.
Th1 A proinflammatory type of T cell.
Th2 A less inflammatory type of T cell which can control Th1
cells.
Triglycerides A type of blood fat thought to be involved in coronary heart
disease.
Vasoconstrictor: Causes blood vessels to narrow.
Vasodilators: Causes blood vessels to dilate.
Vascular: Pertaining to blood vessels.
* * * * * * * * * * * * *
Item 2. Description of Property.
The Company's principal facility, which is leased, is located at 2155
Dunwin Drive, Suite 10 Mississauga, Ontario, L5L 4M1. The lease covers 8,333
square feet. The lease commenced on May 1, 1998 and expires on April 30, 2005.
Management believes that the existing facility is adequate for the Company's
current and future needs. Management continually monitors the Company's facility
requirements in light of the results of its research and development activities.
Item 3. Legal Proceedings.
There are no legal proceedings of a material nature pending against the
Company, or its subsidiaries. The Company is unaware of any legal proceedings
known to be contemplated by any governmental authorities.
Item 4. Control of Registrant.
(a) To the best of the Company's knowledge, the Company is not directly
or indirectly owned or controlled by another corporation or foreign government.
(b) At April 19, 1999, there were 33,561,049 Shares outstanding with an
authorized capital of an unlimited number of shares. At such date, the Company
is unaware of any person beneficially owning 10% or more of the Company's
outstanding shares.
At April 14, 1999, officers and directors, as a group, owned 652,839
shares of the Company.
<PAGE>
There are no arrangements, known to the Company, the operation of which
may at a subsequent date result in a change in control of the Company.
Item 5. Nature of Trading Market.
The Company's Shares commenced trading on The Montreal Exchange in
Canada on July 6, 1996. The Montreal Exchange is the primary trading market for
the Company's Shares. The Company's shares also trade, on a limited basis, on
the NASD OTC Electronic Bulletin Board. Prior to July 6, 1996, the Company's
shares were traded on The Canadian Dealing Network Inc. in Ontario. The
following is a summary of trading, on a quarterly basis, in the Shares on The
Montreal Exchange for 1997, 1998 and the first quarter of 1999 (stated in
Canadian dollars):
<TABLE>
<CAPTION>
1997
<S> <C> <C> <C>
1st Quarter 3.65 1.25 15,074,600
2nd Quarter 3.70 2.00 6,918,100
3rd Quarter 3.00 1.75 3,331,454
4th Quarter 3.30 1.55 5,664,234
1998
1st Quarter 2.30 1.30 3,195,598
2nd Quarter 2.25 1.10 2,236,812
3rd Quarter 1.88 0.81 1,389,975
4th Quarter 1.55 0.81 2,078,939
1999
1st Quarter 2.29 1.10 3,209,118
</TABLE>
The closing sales price of the Shares on the Montreal Exchange on May
19, 1999 was $1.55.
At April 14, 1999, the Company had 4,700 shareholders of record. At
April 14, 1999, there were 26 United States shareholders of record, holding
1,007,868 Shares, which represents 3.0% of the outstanding class.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.
(a) There are no laws or governmental decrees or regulations in Canada
that restrict the export or import of capital, or affect the remittance of
dividends, interest, or other payments to holders of the Company's securities
who are not residents of Canada, other than withholding tax requirements.
Reference is made to "Item 7. Taxation."
(b) There are no limitations imposed by the laws of Canada, the laws of
Ontario or by the charter or other governing documents of the Company on the
right of a non-resident to hold or vote Common Shares of the Company, other than
as provided in the Investment Canada Act (Canada) (the "Investment Act"). The
following summarizes the principal features of the Investment Act for a
non-resident who proposes to acquire Common Shares. The summary is of a general
nature only and is not intended to be nor is it, a substitute of independent
advice from an investor's own advisor. The summary does not anticipate statutory
or regulatory amendments.
<PAGE>
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in the
Investment Act (a "non-Canadian"), unless after review, the minister responsible
for the Investment Act (the "Minister") is satisfied that the investment is
likely to be of net benefit to Canada. Under the Investment Act, a United States
citizen qualifies as a "World Trade Organization Investor." Subject to the
restrictions noted below, an investment in a Canadian business by a World Trade
Organization Investor, would be reviewable under the Investment Act only if it
is an investment to acquire control of such Canadian business and the value of
the assets of the Canadian business as shown on its financial statements is not
less than a specified amount, which for 1998 is $172 million. An investment in
the shares of a Canadian business by a non-Canadian other than a "World Trade
Organization Investor" when the Company is not controlled by a World Trade
Organization Investor, would be review able under the Investment Act if it is an
investment to acquire control of the Canadian business and the value of the
assets of the Canadian business as shown on its financial statements is $5
million or more, or if an order for review is made by the federal cabinet on the
grounds that the investment relates to Canada's cultural heritage or national
identity.
The acquisition by a World Trade Organization Investor of control of a
Canadian business in any of the following sectors is also subject to review if
the value of the assets of the Canadian business exceeds $5 million (as shown on
its financial statements): uranium, financial services (except insurance),
transportation services and cultural businesses, which include broadcast media
(publication, distribution or sale of books, magazines, periodicals, newspapers,
music, film and video products and the exhibition of film and video products),
television and radio services.
A non-Canadian would acquire control of the Company for purposes of the
Investment Act if the non-Canadian acquired a majority of the Common Shares. The
acquisition of less than a majority but one-third or more of the Common Shares
would be presumed to be an acquisition of control of the Company unless it could
be established that, on acquisition, the Company was not controlled in fact by
the acquiree through the ownership of Common Shares.
Certain transactions relating to Common Shares are exempt from the
Investment Act, including:
(a) an acquisition of Common Shares by a person in the ordinary course
of that person's business as a trader or dealer in securities;
(b) an acquisition of control of the Company in connection with the
realization of security granted for a loan or other financial assistance and not
for a purpose related to the provisions of the Investment Act; and
(c) an acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization, following which
the ultimate direct or indirect control in fact of the Company, through the
ownership of Common Shares, remained unchanged.
<PAGE>
Competition Act Review
Investments giving rise to the acquisition or establishment, directly
or indirectly, by one of more persons of control over, or a significant interest
in the whole or part of a business of a competitor, supplier, customer or other
person are subject to substantive review by Canada's Competition Law Authority,
the Director of Investigation and Research (the "Director"). If or when the
Director concludes that Merger, whether by purchase or lease of shares or
assets, by amalgamation or by combination, or otherwise, prevents or lessens, or
is likely to prevent or lessen competition substantially, he may apply as may be
necessary to eliminate the substantial lessening or prevention of competition.
Such substantive Merger review power applies to all Mergers, whether or not they
meet limits for pre-notification under the Competition Act.
In addition to substantive Merger review, the Competition Act provides
for a notification regime respecting Mergers of certain size. The regime applies
in respect of share acquisitions, asset acquisitions, amalgamations and
combinations, for ease of reference. This filing refers specifically to share
acquisition, although the pre-notification regime applies, with the appropriate
modification, to other types of acquisition of control as well.
In order for a share acquisition transaction to be pre-notifiable, the
parties to the transaction (being the person or persons who proposed to acquire
shares, and the Corporation the shares of which are to be acquired), together
with their affiliates (being all firms with a 50% or more voting shares linkage
up and down the chain) must have:
(i) aggregate gross assets in Canada that exceed $400,000,000.00 in
value, as shown on their audited financial statements for the most recently
completed fiscal year (which must be within the last fifteen (15) months); or
(ii) aggregate gross revenue from sales in, from, or into Canada that
exceed $400,000,000.00 for the most recently completed fiscal year shown on the
said financial statements; and
(iii) the party being acquired must have gross assets in Canada, or
gross revenues from sales in or form Canada, exceeding $35,000,000 as whose on
the said financial statements. Acquisition of shares carrying up to 20% of the
votes of a publicly traded corporation, or 35% of the votes in a private
corporation will not be subject to pre-notification, regardless of the above
thresholds. However, exceeding the 20% or the 35% threshold, and again exceeding
the 50% threshold, gives rise to an obligation of notification if the size
threshold is met.
If a transaction is pre-notifiable, a filing must be made with the
Director containing the prescribed information with respect to the parties, and
a waiting period, (either seven or twenty-one days, depending on whether a long
or short form filing is chosen) must expire prior to closing.
As an alternative to pre-notification, the Director may grant an
Advance Ruling Certificate, which exempts the transaction from pre-notification.
Advance Ruling Certificates are granted where the Director concludes, based on
the information provided to him, that he would not have sufficient grounds on
which to apply to the Competition Tribunal to challenge the Merger.
<PAGE>
Item 7. Taxation.
The following summary describes the principal Canadian federal income
tax considerations generally applicable to a holder of the Company's Shares who,
for purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") and the
Convention between Canada and the United States of America with Respect to Taxes
on Income and on Capital (the "Convention") and at all relevant times, is
resident in the United States and not resident in Canada, deals at arm's length
with the Company, holds the Company's Shares as capital property, and does not
use or hold and is not deemed to use or hold the Company's Shares in or in the
course of carrying on business in Canada (a "United States Holder").
This following summary is based upon the current provisions of the
Canadian Tax Act, the regulations thereunder, all specific proposals to amend
the Canadian Tax Act and the regulations announced by the Minister of Finance
(Canada) prior to the date hereof and the Company's understanding of the
published administrative practices of Revenue Canada, Customs, Excise and
Taxation. This summary does not take into account or anticipate any other
changes in the governing law, whether by judicial, governmental or legislative
decision or action, nor does it take into account the tax legislation or
considerations of any province, territory or non-Canadian (including U.S.)
jurisdiction, which legislation or considerations may differ significantly from
those described herein.
This summary is of a general nature only and is not intended to be, and
should not be interpreted as legal or tax advice to any prospective purchaser or
holder of the Company's Shares and no representation with respect to the
Canadian federal income tax consequences to any such prospective purchaser is
made. Accordingly, prospective purchasers of the Company's shares should consult
their own tax advisors with respect to their individual circumstances.
Dividends on the Company's Shares
Generally, dividends paid by Canadian corporations to non-resident
shareholders are subject to a withholding tax of 25% of the gross amount of such
dividends. However, pursuant to the Canada-United States Income Tax Convention
(the "Convention"), the withholding tax rate on the gross amount of dividends
paid to residents of the United States is reduced to 15% or, in the case of a
U.S. corporation which owns at least 10% of the voting stock of the Canadian
corporation paying the dividends, to 5% of the gross amount of such dividends.
Pursuant to the Convention, certain tax-exempt entities resident in the
United States may be exempt from Canadian withholding taxes, including any
withholding tax levied in respect of dividends received on the Company's Shares.
Disposition of the Company's Shares
In general, a United States Holder will not be subject to Canadian income
tax on capital gains arising on the disposition of the Company's Shares, unless
(i) such shares are "taxable Canadian property" within the meaning of the Income
Tax Act (Canada) (the "Act") and no relief is afforded under any applicable tax
treaty. The shares of the Company would be taxable Canadian property of a
non-resident if at any time during the five year period immediately preceding a
disposition by the non-resident of such shares, not less than 25% of the issued
shares of any class or series of al class of shares of the Company belonged to
the non-resident, to persons with whom the non-resident did not deal at arm's
length, or to the non-resident and persons with whom the non-resident did not
deal at arm's length for purposes of the Act. For this purpose, issued shares
includes options to acquire such shares (including conversion rights) held by
such persons. Under the Convention, a capital gain realized by a resident of the
United States will not be subject to Canadian tax unless the value of the shares
of the Company is derived principally from real property (as defined in the
Convention) situated in Canada.
<PAGE>
Item 8. Selected Financial Data.
Following is selected financial data of the Company, expressed in
Canadian dollars, for each of the last five fiscal years ended November 30,
calculated in accordance with Canadian generally accepted accounting principles,
which except as described in Note 10 to the financial statements, conform in all
material respects with accounting principles generally accepted in the United
States.
<TABLE>
<CAPTION>
Years ended November 30
(in thousands of dollars except
for per share data) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Research & development 4,656 5,351 3,167 1,496 382
Other expenses 2,656 2,640 1,695 827 614
Loss for the
period (7,312) (7,991) (4,862) (2,323) (996)
Loss per share (0.29) (0.38) (0.38) (0.27) (0.18)
Working capital 4,807 7,188 5,426 1,644 251
Total assets 7,490 9,470 7,696 3,550 2,384
Share capital 36,139 31,172 21,541 12,735 9,171
Deficit (29,395) (22,083) (14,092) (9,230) (6,907)
Shareholders' equity 6,744 9,089 7,449 3,505 2,264
</TABLE>
Notes:
(1) To date, the Company has been in the development stage and, accordingly, has
no revenue.
(2) The common shares of the Company were consolidated on a
seven-for-one basis on April 21, 1994.
All dollar amounts herein are expressed in Canadian dollars, except
where otherwise indicated. Reference is made to footnote number 2, on page 2 for
a summary of the exchange rates between the U.S. and Canadian dollar for the
past five years.
Reference is made to Note 10 of the Company's audited financial
statement for the year ended November 30, 1998, in "Item 18. Financial
Statements.", for a description of the differences between Canadian and United
States generally accepted accounting principles, and how these differences
affect the Company's financial statements.
<PAGE>
The following table sets forth how the above amounts would be presented
under United States generally accepted accounting principles for the fiscal
years ended November 30, 1998, 1997 and 1996:
Fiscal Years Ended November 30
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Research and development 4,631 5,225 3,371
Loss for the period (7,415) (8,332) (5,066)
Basic and diluted loss per share (0.29) (0.39) (0.40)
Total Assets 5,652 7,606 5,705
Share Capital 36,795 31,700 21,602
Deficit (31,889) (24,474) (16,143)
Shareholders' equity 4,906 7,226 5,459
</TABLE>
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction
with the audited financial statements and notes thereto. See "Item 18. Financial
Statements." The financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) in Canada which, except as
described in Note 10, conform in all material respects with accounting
principles generally accepted in the United States. In addition to historical
information, the following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those anticipated in these forward-looking statements as a
result of certain factors, including those discussed in "Risk Factors" and else
where in this Annual Report.
Overview
Vasogen is focused on the development and commercialization of immune
modulation therapies for the treatment of human disease. Delivered by a medical
device technology, these therapies utilize components derived from a patient's
own blood which are believed to down-regulate or inhibit destructive immune
processes involved in a number of major diseases. In collaboration with leading
university research centres, the Company has several therapies in development
for the treatment of cardiovascular and autoimmune disease, and for the
prevention or amelioration of ischemia/reperfusion injury. Vasogen is also
developing a process for treating bone marrow to prevent Graft-versus-Host
disease, a life threatening complication of bone marrow transplantation.
Delivered by a platform medical device technology, Vasogen's therapies
are designed to target fundamental disease causing processes effectively while
causing fewer side effects than current therapies. The Company has an active
research and development program for new products and the advancement of
existing products. The Company controls the development and manufacture of its
technologies for use in pre-clinical and clinical research and continues to
advance its product development program to support commercial scale production.
Patent applications are filed by the Company to protect its products and
processes. The Company's policy is to file patent applications to protect
inventions, technology, and improvements that are important to the development
of its business and with respect to the application of its therapies to the
treatment of a number of disease indications. The Company currently has four
issued patents and eight patent applications.
<PAGE>
The Company intends to commercialize its therapies through licensing
agreements with established health care companies.
During 1998, Vasogen remained in a research and development phase and
has not yet generated revenues. To fund its operations, the Company relies
principally upon the proceeds of public and private offerings of equity
securities and the resulting interest revenue generated. In the future, the
Company may establish alliances with other health care companies to assist in
marketing its therapy, as well as to provide research and development funding.
The Company has received regulatory approval for VasoCare(TM) therapy
for the treatment of peripheral vascular disease (PVD). Marketing the Company's
products outside the European Community, or offering it for the treatment of
disease indications, other than PVD, within the European Community will require
the completion of further clinical trials and/or regulatory approvals, the
timing and outcome of which will impact future operations.
Results of Operations
The Company is in its research and development phase and, as such, has
incurred losses since its inception. For the fiscal year ended November 30,
1998, the Company recorded a loss of $7.3 million, or $0.29 per common share.
These results compare with a loss of $8.0 million or $0.38 per common share, for
the fiscal year ended November 30, 1997 and a loss of $4.9 million or $0.38 per
common share, for the fiscal 1996.
Research and development expenses, including costs associated with
pre-clinical and clinical research, product development, and regulatory affairs,
decreased by $0.7 million, in fiscal 1998, as compared to fiscal 1997 and
increased by $1.5 million as compared to fiscal 1996.
The major reason for the decrease in research and development expenses
in 1998 as compared to 1997 is the one-time costs associated with preparing for
the European regulatory approval process and the implementation of a quality
system registered to ISO 9001 and EN 46001 incurred during 1997. The increase in
fiscal 1997 as compared to fiscal 1996 also reflected new research at the
University of Montreal and increased product development and intellectual
property activity.
Professional fees increased by $0.1 million in fiscal 1998, compared to
fiscal 1997 and by $0.4 million compared to fiscal 1996. These include legal,
audit, tax, market research, strategic planning, investor relations, and other
consulting costs not directly related to research and development. The increase
in 1998 was associated with increased corporate activity. During 1997, the
Company filed a 20-F Registration Statement with the Securities and Exchange
Commission in the United States.
Salary expenses decreased by $0.1 million, compared to fiscal 1997 and
increased by $0.5 million compared to fiscal 1996. The reduction in salary
expense in 1998 was the result of higher expenses required to support the
Company's preparation for the European regulatory approval process during 1997.
Salary expenses increased in fiscal 1997, compared to fiscal 1996, as the
Company added staff commensurate with corporate growth and development
activities. The increase in salary expenses in 1997 also reflected the full-year
impact of employees added during 1996.
Liquidity and Capital Resources
As at November 30, 1998, the Company had cash equivalents and
marketable securities of $5.2 million, versus $7.5 million in the previous year.
Cash equivalents consist of certificates of deposit and Canadian government
treasury bills. Marketable securities include bonds with varying maturities
issued by Canadian governments and corporations, which are capable of prompt
liquidation.
<PAGE>
Cash used for operations in fiscal 1998 was $6.9 million, compared to
$7.5 million in fiscal 1997. This decrease resulted from one-time costs incurred
in 1997 to support the Company's successful European regulatory approval process
and lower product development expenses in 1998.
Cash provided from financing activities during fiscal 1998 was $4.9
million, compared to $9.4 million in fiscal 1997. The Company completed private
placements for proceeds of $4.6 million net of share issue costs. A total of
2,881,860 Common Shares was issued in connection with these placements.
Additional funding was generated through the exercise of warrants and options,
for proceeds of $0.3 million, which resulted in the issuance of 327,870 Common
Shares. During 1998, 33,500 Common Shares valued at $0.05 million were issued
for services provided to the Company.
As at November 30, 1998, the Company had no long-term obligations.
Year 2000
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium (Year 2000) approaches. The
Year 2000 issue creates risks for the Company from unforeseen problems that may
occur in its own computer systems and Company products that incorporate computer
systems, as well as in those of third parties with whom the Company interacts.
The Company has contracted an external consulting firm to assess its internal
computer systems with respect to the Year 2000 issue. This assessment is near
completion, with no significant issues identified to date. Vasogen has
established an internal task force led by senior management to deal with the
Year 2000 issue. The Company has undertaken a review of its internal computer
systems to assess the risk of a material effect on the Company's financial
condition or results of operations as a result of the Year 2000 issue. The
Company believes that it will be compliant before the end of the 1999 calendar
year. The Company has made reasonable inquiry of its major suppliers as to their
Year 2000 compliance to add further assurance. The Company has implemented
certain contingency plans with respect to its major suppliers, including
building up a significant level of inventory and identifying alternative sources
of supply. The Company will continue to develop contingency plans as it
identifies the opportunity to mitigate third party exposures to the Year 2000
issue. The Company's Year 2000 plans and progress have also been reviewed
through an independent review of its medical device technology and quality
system. No costs of significance in respect of Year 2000 issues have been
incurred to date and costs anticipated in the future are not expected to be
material. Any costs associated with this issue will be treated, in the financial
statements of the Company, in accordance with generally accepted accounting
principles. Generally, the Company believes that as a development stage company,
the scope of Vasogen's activities and the structure of its information
technology function are such that Vasogen is not at material risk in respect of
the Year 2000 issue.
<PAGE>
Item 10. Directors and Officers of Registrant.
The following table outlines the names and municipalities of residence of each
of the directors and officers of Vasogen, their principal occupations and their
periods of service as directors or officers. Each director is expected to hold
these positions until the next Annual General Meeting of Shareholders, scheduled
for May 26, 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Name of Directors Principal Occupation Position Since
and Executive Officers
===========================================================================================================
<S> <C> <C>
William A. Cochrane +, OC, MD Chairman of the Board February 1995
Calgary, Alberta and a Director of the Company and Healthcare
Consultant
- -----------------------------------------------------------------------------------------------------------
David G. Elsley, MBA President, CEO and a Director of the Company January 1991
Toronto, Ontario
- -----------------------------------------------------------------------------------------------------------
William R. Grant * Director of the Company and Chairman of November 1998
New York, NY Galen Associates
- -----------------------------------------------------------------------------------------------------------
Graham Strachan + Director of the Company and President & CEO September 1998
Mississauga, Ontario of Allelix Biopharmaceuticals
- -----------------------------------------------------------------------------------------------------------
Dr. Eldon Smith Vice-President, Scientific Affairs and a May 1998
Calgary Alberta Director of the Company
- -----------------------------------------------------------------------------------------------------------
Benoit La Salle *+ Director of the Company and President of January 1997
Montreal, Quebec Semafo Inc.
- -----------------------------------------------------------------------------------------------------------
Jan-Eric Osterlund * Director of the Company and Chairman of February 1997
London, United Kingdom QueQuoin Holdings
- -----------------------------------------------------------------------------------------------------------
Christopher J. Waddick Vice-President, Finance, Chief Financial January 1991
Chatham, Ontario Officer, Corporate Secretary and Treasurer
of the Company
- -----------------------------------------------------------------------------------------------------------
Paul G.A. Moore Executive Vice-President and Chief Operating February 1997
Burlington, Ontario Officer of the Company
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
1. * denotes a member of the Audit Committee of the board of directors.
2. + denotes a member of the Compensation and Corporate Governance Committee
of the board of directors.
3. The Company does not have an executive committee of the board of directors.
<PAGE>
Directors and Officers
William A. Cochrane, OC, MD, Chairman of the Board, Director
Dr. Cochrane joined the Board of Directors as Chairman in 1995. As Chairman, he
is responsible for guiding the Company's strategic development through to
commercialization. For ten years the Chairman and Chief Executive Officer of
Connaught Laboratories Ltd., Dr. Cochrane is currently an international
investment consultant in the area of health products and services. He serves on
several boards, including MDS Capital Corp., StressGen Biotechnologies Corp, and
Selective Genetics Inc. of San Diego. He was a senior advisor to Vencap Equities
Alberta Ltd. He is a past Chairman of the National Biotechnology Advisory
Committee. Dr. Cochrane was the first Dean of Medicine of the University of
Calgary Medical School and his academic career culminated in his appointment as
President and Vice-Chancellor of the University of Calgary. He served for a
short time as Deputy Minister of Health Services in the Government of Alberta.
David Elsley, MBA, President and Chief Executive Officer, Director
Mr. Elsley has served as an officer and director since 1992. In this capacity,
he has been responsible for identifying, acquiring the Company's technology and
for assembling a management team with the requisite experience to manage the
commercial development of Vasogen's products. Prior to joining Vasogen Inc., he
held marketing and management positions in the computer industry with Seiko
Epson Corporation and the Hudson's Bay Company of Canada. Mr. Elsley holds a
Master of Business Administration from the University of Western Ontario.
William R. Grant, Director
Mr. Grant co-founded Galen Associates in 1990 and possesses a combination of
more than 40 years of experience in the investment banking and risk-capital
fields. In addition, his career includes substantial experience in the
healthcare industry. During his 25 years with Smith Barney, Mr. Grant was
elected President and then Vice-Chairman. He participated in the financing of
many healthcare companies, including G. D. Searle, A. H. Robins, Marion
Laboratories (now Hoechst Marion Roussel), American Hospital Supply Corp., and
SmithKline Beecham. Mr. Grant, then, joined MacKay-Shields Financial Corporation
as President and was later elected Chairman of the Board. He served as Vice
Chairman of SmithKline Beecham for ten years and currently serves on the Boards
of Allergan, Inc.; Fluor Corporation; MiniMed Inc.; Ocular Sciences, Inc.;
WBN.com; Witco Corporation and several private Galen portfolio companies. He is
a Trustee of the Mary Flagler Cary Charitable Trust and a member of the General
Electric Equity Advisory Board.
Benoit La Salle, CA, Director
Mr. La Salle is a chartered accountant and is a member of the Quebec Order of
Chartered Accountants, the Canadian Institute of Chartered Accountants, the
Order of Chartered Administrators of Quebec and the Quebec Institute of
Financial Planners. He holds a Commerce degree from McGill University and a
Master of Business Administration from IMEDE, Switzerland. In 1980 he founded
Parisien, Grou, La Salle and Grou La Salle & Associes, Chartered Accountants.
Mr. La Salle is currently President . of Semafo Inc. and the Chairman of the
Board of Vauquelin Mines Ltd. He has extensive experience in international
taxation. He is the Treasurer and member of the executive board committee of
Foster Parents Plan of Canada, and a member of the board of several Canadian
companies.
<PAGE>
Jan-Eric Osterlund, MMech Eng, MBA, Director
Mr. Osterlund is chairman of QueQuoin Holdings Ltd., a UK investment group
specializing in medical venture capital. He is also chairman of Phairson Medical
Ltd., a biotechnology group; Jomed NV, a medical device company; Stril AB, a
leader in radiation sterilization; Epivac Ltd. and BM Research A/S, both of
which specialize in drug delivery systems. Mr. Osterlund is a Director of
Ermitage International Ltd., a money management company; Shilling Banco Ltd., a
UK commercial real estate investment company; and Ostrumentia, a Swedish
commercial real estate investment company. Mr. Osterlund is also a Director of
Indigo Aviation AB, a company quoted on NASDAQ. Mr. Osterlund holds a Masters of
Mechanical Engineering from Chalmers, Gothenburg and a Masters of Business
Administration from the University of Uppsala. He structured the buy-out of
HemoCue from Pharmacia Incorporated in 1988, became its Chairman and later sold
the group in 1992. Since 1983, Mr. Osterlund has managed his business interests
from London, England.
Eldon R. Smith, MD, FRCP(C), FACC, Vice-President Scientific Affairs, Director
Dr. Smith, is a Professor at the University of Calgary Medical School, Alberta,
where he was the former Dean of the Faculty of Medicine, and previously Head of
the Department of Medicine and Head of the Division of Cardiology. He is a
distinguished clinician and research scientist who has made major contributions
to the Canadian cardiology and medical communities. He has served as President
of the Canadian Cardiovascular Society, Chairman of the Scientific Grant Review
Committee of the Heart and Stroke Foundation, and President of the Association
of Canadian Medical Colleges. He has received numerous awards and serves on the
advisory or corporate boards of a number of Canadian companies. Dr. Smith is a
graduate of Dalhousie University Medical School and received his cardiology and
research training at the National Heart Institute, London, U.K. and the National
Institutes of Health, Bethesda, Maryland.
Graham Strachan, Director
Mr. Strachan became President and Chief Executive Officer of Allelix
Biopharmaceuticals Inc. in 1988. Mr. Strachan was involved in the formation of
Allelix in 1983 as Vice-President and Commercial Director and participated in
the growth and evolution of the original Allelix venture into three independent
companies. Prior to joining Allelix, Mr. Strachan was Vice-President for
Commercial Development at John Labatt Limited. During 15 years with Labatt, Mr.
Strachan was involved in patents and licensing, technology management and
business development. Previously, Mr. Strachan worked for several years in
product licensing with the European Division of Schering Inc., a major
pharmaceutical company. Mr. Strachan has served on the National Biotechnology
Advisory Committee (NBAC) since 1989 and has been Chairman since 1992. Mr.
Strachan serves as a Director and past-Chair of the Industrial Biotechnology
Association of Canada, as well as past-President of the Biotechnology Industry
Organization (BIO), an international trade association for biotechnology
companies, based in Washington, D.C. Mr. Strachan is a chemistry graduate from
the University of Glasgow, a qualified patent agent and a Fellow of the Patent
and Trade Mark Institute of Canada.
Paul G.A. Moore, P.Eng., MBA, Executive Vice-President & Chief Operating Officer
Mr. Moore was formerly a senior manager with Gennum Corporation, a leading
Canadian microelectronics manufacturer, where he was responsible for the growth
of Gennum's Video and Broadcast business. Mr. Moore, a Professional Engineer,
received a Bachelor of Applied Science in Electrical Engineering from the
University of Waterloo in 1985. He also holds a Master of Business
Administration from the University of Western Ontario.
<PAGE>
Christopher J. Waddick, MBA, CMA, Vice-President, Finance, Chief Financial
Officer, Corporate Secretary and Treasurer
As Chief Financial Officer, Mr. Waddick is responsible for managing the
Company's financial and corporate affairs. Mr. Waddick has over ten years'
experience in various financial roles. Prior to joining Vasogen, he was
responsible for financial planning at Union Gas Limited, a leading North
American energy services provider. He holds an honours Business degree from
Wilfrid Laurier University and has his CMA designation. Mr. Waddick obtained his
Master of Business Administration from York University.
Scientific Advisory Board
The members of this board are:
Paul W. Armstrong, MD, FRCP(C), FACC
Dr. Armstrong is Chairman of the Department of Medicine and Professor of
Medicine at the University of Alberta Medical School, Edmonton, Alberta. He was
previously Chief of the Division of Cardiology at St. Michael's Hospital in
Toronto and Professor of Medicine at the University of Toronto. He is widely
recognized for his role in organizing and leading major international,
multi-centre, clinical trials in the area of cardiovascular disease. He has
served as Chairman of the Scientific Review Committee and Vice-President
(Medical) of the Heart and Stroke Foundation of Canada and as a regional
governor of the American College of Cardiology. Dr. Armstrong is a medical
graduate of Queen's University and received his clinical training in cardiology
and research at St. George's Hospital in London, the Massachusetts General
Hospital and Harvard Medical School. His major research interests include
coronary artery disease and congestive heart failure.
<PAGE>
Pavel Hamet, MD, PhD, FRCP(C)
Dr. Hamet is Director of Research of the Centre hospitalier de l'Universite de
Montreal (CHUM), and Chief of the Laboratory of Molecular Medicine at the CHUM
Research Centre in Montreal, and a Professor of Medicine at the University of
Montreal. He is an international authority on the molecular biology and genetics
of hypertension and has a major interest in diabetes. He has published over 300
research papers and has held many distinguished positions including President of
the Canadian Hypertension Society. Dr. Hamet graduated in Medicine from Charles
University, Prague, Czechoslovakia, and received his speciality and research
training in Paris, Montreal, and Nashville, Tennessee.
Richard G. Miller, PhD, FRSC
Dr. Miller is a Professor and Chairman of the Department of Medical Biophysics
at the University of Toronto, where he was founding and Acting Chairman of the
Department of Immunology from 1984 through 1990. He is also a Past President of
the Canadian Society of Immunology and a Fellow of the Royal Society of Canada.
An internationally recognized scientist and leader in the field of immunology,
he has received many honours including being an invited visiting scientist at
many of the world's leading immunology centres. He is the author of over 150
publications and numerous book chapters, and has been a member of the editorial
board of several key scientific journals in the areas of immunology and cancer.
Dr. Miller is a gold medal graduate in Physics from the University of Alberta,
and was awarded his PhD at the California Institute of Technology.
Robert Roberts, MD, FRCP(C), FACC
Dr. Roberts is Chief of Cardiology at Baylor College of Medicine and The
Methodist Hospital, Houston, Texas, one of the world's leading centres for
cardiovascular care, research and education. Dr. Roberts, a Professor in the
Departments of Medicine, Physiology and Biology, is an active clinician and
researcher recognized for his groundbreaking research on cardiac creatine kinase
(CK-MB), a key diagnostic marker for cardiac injury, as well as for his original
contributions to the molecular biology and genetics of heart disease. He and his
research team are credited with uncovering the genetic basis for several
inherited cardiac disorders. He is the author of more than 500 scientific
publications and sits on several key editorial boards. Dr. Roberts has received
many honours and awards, the most recent of which was the prestigious American
College of Cardiology's 1998 Distinguished Scientist Award. In addition to his
contributions to basic research, Dr. Roberts is also well recognized for his
role as a principal investigator in several pivotal clinical trials related to
the introduction of new therapies for heart disease.
Duncan J. Stewart, MD, FRCP(C)
Dr. Stewart was appointed Chief, Division of Cardiology, St. Michael's Hospital,
Toronto and Associate Professor of Medicine, University of Toronto, in 1994. In
1997 he was appointed as Director, Division of Cardiology of the University of
Toronto, and was awarded the Dexter H-C Man Chair of Cardiology. He has combined
a keen interest in clinical cardiovascular research with laboratory science. He
is an international authority on the study of gene regulation in endothelial
cells (cells which line blood vessels) and the clinical effects of endothelial
cell dysfunction on the cardiovascular system with particular reference to
congestive heart failure and pulmonary hypertension. Dr. Stewart is a medical
graduate of McGill University and received his post-graduate, clinical
cardiology, and research training at the Royal Victoria Hospital and McGill
University in Montreal.
<PAGE>
Item 11. Compensation of Directors and Officers
The following table sets forth all compensation for all periods
indicated in respect of the individual who was, as of November 30, 1998, the
chief executive officer of the Company, and all other officers of the Company
who received, during the financial year of the Company ended November 30, 1998,
salary and bonus in excess of $100,000 ("Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
-----------------------------------
------------------------------------
Awards Payouts
------------------------------------
Restricted
Securities Shares
Under Or
Other Options/ Restricted
Name and Principal Position Annual SARs Share LTIP All Other
Year Salary Bonus(2) Compensation Granted Units Payouts Compensation
($) ($) ($) (#) ($) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
David Elsley 1998 167,200 63,954 687,800(1)
(President and Chief 1997 161,183 565,000
Executive Officer) 1996 125,000 565,000
- --------------------------------------------------------------------------------------------------------------------------
Paul Moore 1998 150,000 47,325 405,700(1) 62,499 (3)
(Executive Vice-President, 1997 131,000 330,000 61,067(3)
Chief Operating Officer) 1996 46,000 30,000
- --------------------------------------------------------------------------------------------------------------------------
Dr. Anthony Bolton 1998 150,000 47,925 526,700(1)
(Director Research and 1997 150,000 450,000
Development) 1996 100,000 450,000
- --------------------------------------------------------------------------------------------------------------------------
Christopher Waddick 1998 132,200 41,709 346,700(1)
(Vice-President Finance, 1997 124,067 25,000 280,000
Chief Financial Officer, 1996 59,800 80,000
Corporate Secretary and
Treasurer)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This is a cumulative total and represents the aggregate number of
securities under option at November 30, 1998.
(2) Bonus paid through the issuance of common shares of the Company.
(3) This payment was made to compensate Mr. Moore for loss of benefits suffered
as a result of his acceptance of the position of Chief Operating Officer of
the Company.
<PAGE>
Employment Contracts
The Company has entered into an employment agreement, made as of the
1st day of January 1997, with Mr. David G. Elsley. Pursuant to this agreement,
Mr. Elsley serves the Company as its President and Chief Executive Officer. The
following is the summary of the terms of the agreement with Mr. Elsley. The
agreement provides for a fixed five-year term ending on December 31, 2002, and
an annual remuneration of $167,200. Mr. Elsley is entitled to benefits available
to other employees of the Company. The agreement is terminable at the option of
the Company; however, if such agreement is not terminated for cause, Mr. Elsley
is entitled to a lump sum payment equal to two years' salary and any options or
warrants then outstanding vest for their full term. The agreement contains
standard non-competition and non-solicitation provisions.
The Company has entered into an employment agreement, made as of the
1st day of February 1997, with Dr. Anthony E. Bolton. Pursuant to this
agreement, Dr. Bolton serves the Company as its Director of Research. The
agreement provides for an annual remuneration of $150,000. The other terms of
the agreement are similar to those described for Mr. Elsley.
The Company has entered in an employment agreement, made as of the 1st
day of February 1997, with Mr. Paul G. A. Moore. Pursuant to this agreement, Mr.
Moore serves the Company as its Executive Vice-President and Chief Operating
Officer. The agreement provides for an annual remuneration of $150,000. The
other terms of the agreement are similar to those described for Mr. Elsley.
The Company has entered in an employment agreement, made as of the 10th
day of March 1997, with Mr. Christopher J. Waddick. Pursuant to this agreement,
Mr. Waddick serves the Company as its Vice-President, Finance, Chief Financial
Officer, Corporate Secretary and Treasurer. The agreement provides for an annual
remuneration of $132,200. The other terms of the agreement are similar to those
described for Mr. Elsley.
Compensation of Directors
During the financial year ended November 30, 1998 no directors' fees
were paid. One member of the board of directors was paid $42,750 in consulting
fees in the fiscal year ended November 30, 1998 for consulting services
rendered.
Officers and directors, as a group, received total cash remuneration of
approximately $705,000 during the fiscal year ended November 30, 1998.
No amount has been set aside or accrued by the Company and its
subsidiaries during the last fiscal year of the Company to provide pension,
retirement or similar benefits for directors and officers of the Company,
pursuant to any existing plan provided or contributed to by the Company and its
subsidiaries.
<PAGE>
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.
Stock Option Plan
The Company maintains a stock option plan pursuant to which a maximum
of 3,500,000 options or such greater number as shall have been duly approved by
the Board of Directors and if required, by any exchange or over-the-counter
market on which the common shares may be listed or quoted for trading or any
security regulatory authority, by the shareholders of the Company, may be
granted by the board of directors to executive officers, directors, employees,
consultants and members of the Scientific Advisory Board of the Company in such
numbers, for such periods of time, and at exercise prices as the board may
approve and according to the rules and regulations of any stock exchange or
dealing network on which the Common Shares may be listed or quoted for trading
from time to time.
The following table sets out information relating to outstanding options and
warrants to purchase common shares granted by the Company that are outstanding
as at the date hereof with the number of persons in each category shown in
parentheses:
<TABLE>
<CAPTION>
NUMBER OF MARKET VALUE OF EXERCISE
COMMON SHARES DATE OF SECURITIES ON PRICE PER EXPIRY DATE
OPTIONED GRANT DATE OF GRANT SHARE
<S> <C> <C> <C> <C> <C>
Executive Officers
(Five)
125,000 Feb. 9, 1995 1.00 1.00 Feb. 9, 2000
160,000 July 5, 1995 1.15 1.15 July 5, 2000
300,000 Sept 15, 1998 1.00 1.00 Sept 15, 2003
50,000 July 5, 1995 1.39 1.39 July 5, 2000
300,000 May 28, 1996 1.00 1.00 May 28, 2001
100,000 June 19, 1996 1.20 1.20 June 18,2001
60,000 Jan. 8, 1997 1.69 1.69 Jan. 8, 2000
280,774 Dec 15, 1998 1.25 1.25 Dec 15, 2003
100,000 June 19, 1996 1.20 1.20 June 18,2002
300,000 Jan. 8, 1997 1.69 1.69 Jan. 8, 2002
Directors
(Excluding Executive
Officers) (Four)
100,000 Sept 15, 1998 1.00 1.00 Sept 15, 2001
100,000 Dec 15, 1998 1.25 1.25 Dec 15, 2001
100,000 Jan. 8, 1997 1.69 1.69 Jan. 8, 2000
100,000 May 1, 1997 2.30 2.30 May 1, 2000
Other Employees Of
And Advisors To
The Company
(Twenty)
100,000 Nov. 17, 1994 0.50 0.50 Nov. 17, 1999
150,000 Feb. 9, 1995 1.00 1.00 Feb. 9, 2000
150,000 July 5, 1995 1.00 1.00 July 5, 2005
20,000 July 5, 1995 1.15 1.15 July 5, 2000
40,000 May 23, 1995 1.00 1.00 May 23, 2000
63,202 July 5, 1995 1.15 1.39 July 5, 2000
10,000 Nov. 24, 1995 1.10 1.10 Nov 24, 2000
115,000 May 7, 1998 2.00 2.00 May 7, 2003
50,000 Jan. 8, 1997 1.69 1.69 Jan. 8, 2000
170,416 Dec 15, 1998 1.25 1.25 Dec 15, 2003
225,000 Sept 15, 1998 1.00 1.00 Sept 15, 2003
10,000 May, 1 1997 2.30 2.30 May 1, 2000
25,000 May 1, 1997 2.30 2.30 May 1, 2002
100,000 Jan 24, 1996 1.15 1.15 Jan. 24, 2001
200,000 June 19, 1996 1.20 1.20 June 18,2001
100,000 June 30, 1996 1.25 1.25 June 30,2001
100,000 June 19, 1996 1.20 1.20 June 18, 2002
300,000 Aug. 1, 1996 1.10 1.10 Aug. 1, 1999
72,000 Dec. 3, 1996 1.60 1.60 Dec. 3, 1999
100,000 May 28, 1996 1.00 1.00 May 28, 2001
14,000 Dec. 3, 1997 1.70 1.70 Dec. 3, 2000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF MARKET VALUE OF EXERCISE
COMMON SHARES DATE OF SECURITIES ON PRICE PER EXPIRY DATE
OPTIONED GRANT DATE OF GRANT SHARE
<S> <C> <C> <C> <C> <C>
Other Persons Or
Corporations
(Forty-six)
400,000 Nov. 17, 1994 0.50 0.50 Nov. 17, 1999
100,000 May 28, 1996 1.15 1.15 May 28, 2001
1,481,500 Mar. 10, 1998 1.75 1.75 Nov. 30, 2000
50,000 Dec. 3, 1997 1.70 1.70 Dec. 3, 2000
195,000 Jan. 2, 1996 1.15 1.15 Mar. 13, 2001
671,430 May 25. 1998 1.75 1.75 Nov. 30, 2000
225,000 June 19, 1996 1.20 1.20 June 18,2001
300,000 Jan. 17, 1997 2.48 2.48 Jan. 17, 2001
30,000 June 2, 1997 2.64 2.64 June 2, 2000
30,000 Sept. 2, 1997 2.64 2.64 Sept. 2, 2000
30,000 Dec. 1, 1997 1.87 1.87 Dec. 1, 2000
30,000 Mar. 1, 1998 1.90 1.90 Mar. 1, 2001
30,000 June 1, 1998 1.88 1.88 June 1, 2001
100,000 May 12, 1998 2.00 3.05 Mar. 13, 2002
50,000 Jan. 11, 1999 1.25 1.56 Jan. 11, 2002
100,000 Jan. 8, 1997 1.69 1.69 Jan. 8, 2000
124,000 Jan. 13, 1999 1.98 1.98 July 13, 2000
72,500 Feb. 24. 1999 2.00 2.00 Aug. 22, 2000
</TABLE>
Options/SARs Granted or Exercised During the Most Recently Completed Financial
Year
During the financial year ended November 30, 1998, no stock
appreciation rights or stock options were granted to the Chief Executive
Officer. Details of options granted to the Named Executive Officers during the
financial year ended November 30, 1998 are shown in the table set out below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
% of Total Market Value
Securities, Options/ of Securities
Under SARs Underlying
Options/ Granted to Exercise Options/
Name SARs Employees Or SARs on the Date of
Granted in Financial Base Price Grant Expiration
(#) Year ($/Security) ($/Security) Date
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Christopher 200,000 25% $1.00 $1.00 September 15, 2003
Waddick
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the financial year ended November 30, 1998, no options or stock
appreciation rights were exercised by the Named Executive Officers.
Item 13. Interest of Management in Certain Transactions.
(a) During the fiscal year ended November 30, 1998, there were no
transactions, and there are no proposed transactions, in which directors,
executive officers, holders of ten percent of the Company's outstanding shares,
or any associate or affiliate of such person, have had a material interest,
direct or indirect.
<PAGE>
(b) None of the officers or directors of the Company are indebted to
the Company or were indebted to the Company during the fiscal years ended
November 30, 1998, 1997, and 1996.
PART II
Item 14. Description of Securities to be Registered.
Not Applicable
PART III
Item 15. Defaults Upon Senior Securities.
None.
Item 16. Changes in Securities and Changes in Security for Registered
Securities.
None.
PART IV
Item 17. Financial Statements.
See "Item 18. Financial Statements."
Item 18. Financial Statements.
a) Report and Consolidated Financial Statements for the years ended
November 30, 1998, 1997, and 1996 reported on by KPMG LLP, Chartered
Accountants. These statements are prepared in accordance with generally accepted
accounting principles in Canada, which, except as described in Note 10 conform
in all material respects with accounting principles generally accepted in the
United States.
Item 19. Financial Statements and Exhibits.
1) Financial Statements.
a) Report and Consolidated Financial Statements for the years ended
November 30, 1998, 1997, and 1996 reported on by KPMG LLP, Chartered
Accountants. These statements are prepared in accordance with generally accepted
accounting principles in Canada, which, except as described in Note 10 conform
in all material respects with accounting principles generally accepted in the
United States.
2) Exhibits.
(Exhibits 1, 2, and 3 (a) have been previously filed with the Securities and
Exchange Commission on July 2, 1997 in the Company's Registration Statement on
Form 20 - F, and exhibits 3 (b) and (c) have been previously filed with the
Securities and Exchange Commission on September 1, 1997 in Amendment Number 1 to
the Registration Statement on Form 20 - F and are hereby incorporated by
reference Exhibits 3 (d) has been previously filed with the Securities and
Exchange Commission on June 12, 1998 in the Company's Registration Statement on
Form 20 - F)
<PAGE>
1. Articles of Incorporation and Amendments thereto.
2. By-Laws.
3. List of Agreements.
a. Agreement dated January 31, 1996 between Quarzlampenfabrik Dr. -
Ing. Felix W. Muller and Vasogen Inc.;
b. Agreement dated April 15, 1997 between Delvin Inc. and Vasogen Inc.
c. Agreement dated June 1, 1997 between Dominick & Dominick and
Vasogen Inc.
d. Agreement dated November 30, 1997 between Delvin Inc. and Vasogen
Inc.
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VASOGEN INC.
By: /s/ Christopher J. Waddick
-------------------------------
Christopher J. Waddick
Vice President, Finance, CFO
Date: May 27, 1999
<PAGE>
Consolidated Financial Statements of
VASOGEN INC.
Years ended November 30, 1998, 1997 and 1996
<PAGE>
AUDITORS' REPORT
To the Shareholders of Vasogen Inc.
We have audited the consolidated balance sheets of Vasogen Inc. as at November
30, 1998 and 1997 and the consolidated statements of operations and deficit and
cash flows for each of the years in the three year period ended November 30,
1998 and for the period from December 1, 1987 to November 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at November 30, 1998
and 1997 and the results of its operations and its cash flows for each of the
years in the three year period ended November 30, 1998 and for the period from
December 1, 1987 to November 30, 1998 in accordance with Canadian generally
accepted accounting principles.
[GRAPHIC OMITTED]
Chartered Accountants
Toronto, Canada
December 18, 1998, except
as to note 11 which is as of
February 24, 1999
<PAGE>
VASOGEN INC.
Consolidated Balance Sheets
(In thousands of dollars)
November 30, 1998 and 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) $ 1,073 $ 455
Marketable securities (note 3) 4,128 7,028
Inventory 243 -
Prepaid expenses and advances 109 86
------------------------------------------------------------------------------------------------------
5,553 7,569
Capital assets 158 182
Less accumulated amortization 59 145
- -----------------------------------------------------------------------------------------------------------
99 37
Acquired technology (notes 4 and 9) 1,838 1,864
- -----------------------------------------------------------------------------------------------------------
$ 7,490 $ 9,470
- -----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 746 $ 381
Shareholders' equity:
Share capital (note 5) 36,139 31,172
Deficit (29,395) (22,083)
------------------------------------------------------------------------------------------------------
6,744 9,089
- -----------------------------------------------------------------------------------------------------------
$ 7,490 $ 9,470
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ William Grant Director
- ----------------------
William Grant
/s/ Jan-Eric Osterlund Director
- ----------------------
Jan-Eric Osterlund
<PAGE>
VASOGEN INC.
Consolidated Statements of Operations and Deficit
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
Years ended November 30 November 30,
1998 1997 1996 1998
- --------------------------------------------------------------------------------------------------------------
Expenses:
<S> <C> <C> <C> <C>
Research and development $ 4,656 $ 5,351 $ 3,167 $ 16,537
Salaries 981 1,097 443 3,777
General and administration 822 813 859 4,203
Professional fees 821 717 378 3,118
Amortization of capital assets 32 13 15 250
- --------------------------------------------------------------------------------------------------------------
Loss for the period (7,312) (7,991) (4,862) (27,885)
Deficit, beginning of period, as
restated (note 9) (22,083) (14,092) (9,230) (1,510)
- --------------------------------------------------------------------------------------------------------------
Deficit, end of period $ (29,395) $ (22,083) $ (14,092) $ (29,395)
- --------------------------------------------------------------------------------------------------------------
Loss per share $ (0.29) $ (0.38) $ (0.38)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VASOGEN INC.
Consolidated Statements of Cash Flows
(In thousands of dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
Years ended November 30 November 30,
1998 1997 1996 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss for the period $ (7,312) $ (7,991) $ (4,862) $ (27,885)
Items not involving cash:
Amortization of capital assets and
technology 236 199 196 2,081
Loss on write-off of capital assets 6 - - 24
Forgiveness of debt - - - (63)
Services provided for
common shares 55 215 748 1,957
Changes in non-cash working capital:
Changes in inventory (243) - - (243)
Changes in prepaid expenses
and advances (23) (52) (16) (77)
Changes in accounts payable
and accrued liabilities 365 135 201 686
- --------------------------------------------------------------------------------------------------------------
(6,916) (7,494) (3,733) (23,520)
Financing:
Shares issued for cash 5,043 7,625 3,913 23,407
Warrants exercised for cash 253 1,621 4,539 6,957
Options exercised for cash 95 482 245 1,396
Share issue costs (479) (312) (962) (2,240)
Issue of convertible debt - - - 650
Financing costs - - - (28)
Payable to related parties - - - (232)
- --------------------------------------------------------------------------------------------------------------
4,912 9,416 7,735 29,910
Investing:
Increase in capital assets (100) (17) (36) (346)
Increase in acquired technology (178) (60) - (843)
Purchase of marketable securities - (7,028) - (7,028)
Marketable securities' maturities 2,900 - - 2,900
- --------------------------------------------------------------------------------------------------------------
2,622 (7,105) (36) (5,317)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
Years ended November 30 November 30,
1998 1997 1996 1998
- --------------------------------------------------------------------------------------------------------------
Consolidated Statement of
Cash Flow (continued)
<S> <C> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents 618 (5,183) 3,966 1,073
Cash and cash equivalents,
beginning of period 455 5,638 1,672 -
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,073 $ 455 $ 5,638 $ 1,073
- --------------------------------------------------------------------------------------------------------------
Supplementary disclosures:
Non-cash financing activity:
Debt conversion - - - (650)
Shares issued on debt conversion - - - 650
Shares issued for services 55 215 748 1,957
Shares issued for technology - - 324 2,799
- --------------------------------------------------------------------------------------------------------------
55 215 1,072 4,756
- --------------------------------------------------------------------------------------------------------------
Non-cash investing activity:
Technology acquired for shares issued - - (324) (2,799)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
Since December 1, 1987, the Company has been engaged in the research and
commercial development of its proprietary platform medical technology for the
treatment and prevention of disease. The Company has not had any commercial
operations since that date. The financial information presented has been
prepared on the basis that the Company is considered a development stage
enterprise and accordingly, the statements of operations and deficit and cash
flows reflect the cumulative amounts from December 1, 1987 to November 30, 1998.
1. Significant accounting policies:
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada, which, except as
described in note 10, conform in all material respects with accounting
principles generally accepted in the United States.
(a) Principles of consolidation:
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Vasogen Ireland Limited,
incorporated in 1998.
(b) Cash equivalents and marketable securities:
Cash equivalents and marketable securities held-to-maturity are
stated at the lower of amortized cost or market.
(c) Concentration of credit risk:
Financial instruments potentially exposing the Company to a
concentration of credit risk consist principally of cash equivalents
and marketable securities.
Cash equivalents consist of certificates of deposit and Canadian
government treasury bills having short-term maturities of 90 days or
less from the date of purchase. Marketable securities include bonds
issued by Canadian governments and corporations with varying
maturities generally ranging between six months and sixteen months
from the date of purchase and which are capable of prompt
liquidation. Market value of these securities approximates cost.
<PAGE>
1. Significant accounting policies (continued):
(d) Inventory:
Inventory is carried at the lower of cost or net realizable value.
(e) Capital assets:
Capital assets are stated at cost and include testing equipment,
computer equipment and leasehold improvements. Amortization is
provided on a straight-line basis over five years. The Company
regularly reviews the carrying values of its capital assets. If the
carrying values of its capital assets exceed the amount recoverable,
a write-down is charged to the statement of operations.
(f) Acquired technology:
Acquired technology representing the Company's platform medical
device technology is stated at cost. This technology is amortized
using the straight-line method over 20 years representing the period
from the acquisition date to the expiry date of the technology's
initial patent. On an on-going basis, management reviews the carrying
value and amortization of the technology, taking into consideration
any events and circumstances that might impair its value. The
acquired technology is carried on the consolidated balance sheets at
cost less accumulated amortization of $1,802,775 (1997 - $1,598,605).
(g) Research and development:
Research costs are expensed as incurred. Development costs are
expensed as incurred unless they meet the criteria under generally
accepted accounting principles in Canada for deferral and
amortization. The Company has not deferred any such development
costs.
(h) Foreign currency translation:
The accounts of the Company's Irish subsidiary are translated into
Canadian dollars using the temporal method. Monetary assets and
liabilities are translated at the year end exchange rate,
non-monetary assets and liabilities are translated at the historical
exchange rate and revenues and expenses are translated at average
exchange rates. Gains and losses arising from the translation of the
financial statements of the Irish subsidiary are included in
operations.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(i) Measurement uncertainty:
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 period. Actual results could differ
from those estimates.
2. Cash and cash equivalents:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 1,073 $ -
Cash equivalents - 455
- --------------------------------------------------------------------------------------------------------------
$ 1,073 $ 455
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
3. Marketable securities:
- --------------------------------------------------------------------------------------------------------------
One
One year year plus Yield to
1998 maturity maturities Total maturity
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian federal government bonds $ 100 $ - $ 100 3.62%
Canadian provincial government
bonds 3,107 - 3,107 3.70 - 5.03%
Canadian corporate bonds 598 323 921 5.00 - 5.75%
- --------------------------------------------------------------------------------------------------------------
$ 3,805 $ 323 $ 4,128
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
One
One year year plus Yield to
1997 maturity maturities Total maturity
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian federal government bonds $ 1,282 $ 96 $ 1,378 2.92 - 3.55%
Canadian provincial government
bonds 4,386 119 4,505 2.69 - 3.79%
Canadian corporate bonds 321 824 1,145 5.00 - 6.94%
- --------------------------------------------------------------------------------------------------------------
$ 5,989 $ 1,039 $ 7,028
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
4. Acquired technology:
In 1988, the Company entered into an agreement with Quarzlampenfabrik Dr.
Muller GmbH & Co. KG ("Quarz") of Essen, Germany, which granted to the
Company the sole, exclusive, irrevocable, unconditional, perpetual and
royalty-free right and license to the Patents and Patent Applications
owned by Quarz for proprietary platform medical device technology. The
total consideration paid for the grant of all rights to the Company
amounted to $3,078,301, of which $603,301 was paid in cash and $2,475,000
was paid in common shares of the Company.
Effective January 31, 1996, the Company acquired from Quarz all right,
title and interest in the technology industry patents and technical
information formerly licensed from Quarz thereby allowing the Company to
modify or further develop the technology. Quarz also entered into a
non-competition and confidentiality agreement with the Company. In
consideration for these agreements, the Company issued 270,000 common
shares valued at $324,000; 100,000 common share purchase warrants
entitling the holder to purchase 100,000 common shares at $1.20 per
share; and a graduated royalty of 4% to 6% on sales incorporating the
technology.
During 1997, the Company negotiated an agreement providing it with the
option to modify the royalty payments from the graduated rate of 4% to 6%
to a rate of 1.5% on sales incorporating the technology with the maximum
annual royalty so calculated not to exceed $1,300,000. The cost of the
royalty buy-down is $715,000 payable from the proceeds of future
financings completed by the Company prior to November 1, 1999, net of
interim retainer fees of $10,000 per month. In 1997 and 1998, payments
totalling $60,000 and $178,956 were made respectively. Should the Company
elect not to make the full $715,000 payment, the royalty rate will revert
to the original graduated rates.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. Share capital:
<S> <C> <C> <C>
(a) Common shares, without par value; authorized - unlimited.
- --------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
November 30,
1998 1997 1996 1998
- --------------------------------------------------------------------------------------------------------------
Number of Number of Number of Number of
shares Amount shares Amount shares Amount shares Amount
- --------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands) (In thousands) (In thousands)
Balance, beginning
of year 23,331 $31,172 18,307 $ 21,541 10,057 $12,734 1,031 $ 1,213
Issued for:
Cash 2,882 5,043 3,064 7,625 3,557 3,913 15,079 23,407
Services 33 55 115 215 632 748 1,324 1,957
Technology - - - - 270 324 1,913 2,799
Warrants exercised 228 253 1,352 1,621 3,397 4,539 5,422 6,957
Options exercised 100 95 493 482 394 245 1,381 1,396
Debt conversion - - - - - - 424 650
Share issue costs - (479) - (312) - (962) - (2,240)
- --------------------------------------------------------------------------------------------------------------
Balance, end of year26,574 $36,139 23,331 $ 31,172 18,307 $21,541 26,574 $36,139
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(b) Stock options:
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
(In thousands)
Balance, beginning of year 2,481 1,629 1,128
Issued 569 1,345 895
Exercised (100) (493) (394)
Expired or cancelled (515) - -
- --------------------------------------------------------------------------------------------------------------
Outstanding, end of year 2,435 2,481 1,629
- --------------------------------------------------------------------------------------------------------------
Exercisable, end of year 2,285 1,793 1,179
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The exercise prices set must at least equal the fair value of the
underlying common shares on the date of the grant. Each option
granted allows the holder to purchase one common share. As at
November 30, 1998, these options have exercise prices ranging from
$0.50 to $2.30, generally vest over a maximum period of two years
and expire over various dates to 2003.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. Share capital (continued):
(c) Warrants:
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Warrants
issued for
Warrants financing/
issued for technology
services acquisition Total Total Total
- --------------------------------------------------------------------------------------------------------------
(In thousands)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year 1,965 2,760 4,725 4,078 5,348
Issued 235 2,303 2,538 2,182 2,128
Exercised (50) (178) (228) (1,352) (3,397)
Expired or cancelled (50) (1,100) (1,150) (183) (1)
- --------------------------------------------------------------------------------------------------------------
Outstanding, end of year 2,100 3,785 5,885 4,725 4,078
- --------------------------------------------------------------------------------------------------------------
Exercisable, end of year 2,100 3,785 5,885 4,585 4,078
- --------------------------------------------------------------------------------------------------------------
</TABLE>
As at November 30, 1998, these warrants have exercise prices ranging
from $0.50 to $3.05 and expire over various dates to 2003. Each
warrant granted allows the holder to purchase one common share.
Warrants issued for services are at values which approximate the
market value of the services received.
<PAGE>
(d) Employment options:
The following tables present information on employment options which
include stock options and common share purchase warrants issued for
employment compensation:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
- --------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 4,445 $ 1.43 3,444 $ 1.08 1,678 $ 0.85
Issued 804 1.25 1,745 1.84 2,345 1.15
Exercised (150) 1.01 (744) 1.05 (579) 0.74
Expired or cancelled (565) 2.23 - -
- --------------------------------------------------------------------------------------------------------------
Outstanding, end of year 4,534 $ 1.37 4,445 $ 1.43 3,444 $ 1.08
- --------------------------------------------------------------------------------------------------------------
Exercisable, end of year 4,385 $ 1.35 3,618 $ 1.31 2,994 $ 1.06
- --------------------------------------------------------------------------------------------------------------
</TABLE>
As at November 30, 1998 there were 380,798 (1997 - 569,798) employment options
available for grant.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
5. Share capital (continued):
Employment options outstanding and exercisable as of November 30,
1998 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1998 Employment 1998 Employment
options outstanding options exercisable
- --------------------------------------------------------------------------------------------------------------
Weighted-average
Exercise remaining
price Number contractual life Number
- --------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
$ 0.50 - 1.00 1,570 1.0 - 3.5 1,570
$ 1.01 - 1.39 1,668 1.4 - 2.6 1,643
$ 1.40 - 2.00 1,101 1.0 - 4.5 992
$ 2.01 - 2.64 195 1.5 - 1.9 180
- --------------------------------------------------------------------------------------------------------------
4,534 2.3 4,385
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
6. Fair value of financial instruments:
The carrying values of cash, cash equivalents, marketable securities and
accounts payable and accrued liabilities approximate their fair value due
to the relatively short periods to maturity of the instruments.
7. Income taxes:
Under the Income Tax Act of Canada, certain expenditures are classified
as Scientific Research & Experimental Development expenditures and are
grouped into a pool for tax purposes which is 100% deductible in the year
incurred. This expenditure pool can also be carried forward indefinitely
and deducted in full in any subsequent year.
The balance of the Scientific Research & Experimental Development
expenditure pool at November 30, 1998 is approximately $5,887,000 (1997 -
$3,687,000).
The Company has also earned estimated investment tax credits ("ITCs") on
Scientific Research & Experimental Development expenditures which will
expire as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<S> <C>
2007 $ 35
2008 440
- --------------------------------------------------------------------------------------------------------------
$ 475
- --------------------------------------------------------------------------------------------------------------
</TABLE>
7. Income taxes (continued):
The parent Company has losses of approximately $10,028,000 available to
reduce future taxable income, the benefit of which will be recognized in
the accounts when realized. These tax losses expire as follows:
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<S> <C>
2003 $ 3,555
2004 6,473
- --------------------------------------------------------------------------------------------------------------
$ 10,028
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's subsidiary, Vasogen Ireland Limited, has losses of
approximately $2,576,000 available indefinitely to reduce future taxable
income, the benefit of which will be recognized in the accounts when
realized.
8. Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range
from minor errors to significant systems failure which could affect an
entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting
the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
9. Change in accounting policy:
Prior to 1998, the Company did not amortize its acquired technology.
Commencing in 1998, the Company is amortizing this technology using the
straight-line method over 20 years. This change in accounting policy has
been applied retroactively such that the carrying value of the acquired
technology previously reported has been reduced by and the deficit
increased by $1,802,775 and $1,598,605 as at November 30, 1998 and 1997,
respectively, these amounts representing the accumulated amortization as
at each year-end date; amortization expense, classified within research
and development costs on the consolidated statements of operations and
deficit, increased by $204,170, $186,370 and $180,915 for the years ended
November 30, 1998, 1997 and 1996, respectively; cumulative amortization
expense and the loss previously reported for the period from December 1,
1987 to November 30, 1998 increased by $1,802,775.
10. Differences between generally accepted accounting principles (GAAP) in
Canada and the United States:
The Company's consolidated financial statements are prepared in
accordance with GAAP in Canada which differ in certain respects from
those applied in the United States. The following tables present the
impact of material differences between Canadian GAAP and GAAP in the
United States on the Company's consolidated financial statements.
<PAGE>
(a) Consolidated statements of operations and deficit:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
Years ended November 30 November 30,
1998 1997 1996 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss per Canadian GAAP $ (7,312) $ (7,991) $ (4,862) $ (27,885)
Technology costs (i) (179) (60) (324) (3,641)
Technology amortization (i) 204 186 181 1,803
Non-employee stock options (ii) (128) (467) - (595)
Warrants issued to acquire
technology (iii) - - (61) (61)
- --------------------------------------------------------------------------------------------------------------
Loss per United States GAAP $ (7,415) $ (8,332) $ (5,066) $ (30,379)
- --------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share
under United States GAAP $ (0.29) $ (0.39) $ (0.40)
- ------------------------------------------------------------------------------------------
Weighted average number of (In thousands)
under United States GAAP 25,416 21,360 12,651
- ------------------------------------------------------------------------------------------
</TABLE>
10. Differences between generally accepted accounting principles (GAAP) in
Canada and the United States (continued):
(b) Consolidated balance sheets:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------
United United
Canada States Canada States
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Acquired technology (i) $ 1,838 $ - $ 1,864 $ -
Share capital (ii) (iii) 36,139 36,795 31,172 31,700
Deficit, end of period (i) (ii) (iii) (29,395) (31,889) (22,083) (24,474)
Deficit accumulated during
development stage (i) (ii) (iii) (27,885) (30,379) (20,573) (22,964)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(i) Canadian GAAP permits the capitalization and amortization of
acquired technology costs. Under United States GAAP, such acquired
technology costs are charged to expense. At the acquisition date,
the technological feasibility of this technology had not yet been
established and had no future alternative uses.
(ii) In 1996, Financial Accounting Standards Board Statement of Financial
Accounting Standards (SFAS No. 123) "Accounting for Stock Based
Compensation" was issued and requires the recording of compensation
costs for stock options issued after December 15, 1995 to
non-employees, such as members of the Scientific Advisory Board and
Business Advisory Board, at fair value. The fair value of the
non-employee stock options granted in 1998 has been estimated at the
date of grant using the Black-Scholes option pricing model based on
the assumptions set out in note 10(e). There was no increase in the
loss for 1996 because the amounts so determined were immaterial.
<PAGE>
For purposes of measuring compensation cost under United States
GAAP, the Company has applied the provisions of APB Opinion No. 25
in accounting for stock options and common share purchase warrants
issued for employment compensation ("employment options"). Under
this method compensation cost is measured consistently with the
approach used under Canadian GAAP and accordingly no compensation
expense has been recognized.
(iii)In 1996, 100,000 common share purchase warrants were issued as part
of the technology acquisition consideration (note 4). United States
GAAP requires these acquired technology costs to be recorded in an
amount approximating the fair value of the warrants issued,
estimated at their grant date using the Black-Scholes option pricing
model based on the assumptions similar to those disclosed in note
10(e).
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
10. Differences between generally accepted accounting principles (GAAP) in
Canada and the United States (continued):
(c) Consolidated statements of cash flows:
On August 1, 1998, the Company adopted the new CICA Handbook Standard
on cash flow statements which closely aligns Canadian and United
States accounting policies resulting in the following reconciling
items in 1998; the change has had no significant effect on the
statements of changes in financial position in 1997 and 1996:
Cash from operations under United States GAAP includes the
adjustments (i), (ii) and (iii) to the loss for the period.
Cash used in investing activities under United States GAAP excludes
amounts representing acquired technology (adjustment (i)).
(d) Income taxes:
Under Canadian GAAP, deferred tax assets resulting from the benefit
of loss carryforwards are recognized only when there is virtual
certainty that the losses will be utilized.
United States GAAP requires that deferred income taxes be accounted
for under the liability method whereby deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance against the net deferred tax debits may
be provided due to the uncertainty of realization.
The Company has determined that there is no material difference in
the net deferred income tax position of the Company recognized under
United States GAAP as any deferred taxes initially recognized are
fully offset by a valuation allowance. Management has provided a
valuation allowance equivalent to the gross deferred tax asset given
the nature of the Company's activities and uncertainty that it will
generate sufficient income for tax purposes to utilize these losses
in the carryforward period.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
10. Differences between generally accepted accounting principles (GAAP) in
Canada and the United States (continued):
The approximate tax effect of the Company's temporary difference and
losses carryforward which give rise to the Company's deferred tax
asset are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Years ended November 30
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unclaimed technology costs $ 2,413 $ 1,544 $ 1,516
Loss carryforwards 4,368 7,692 4,452
- --------------------------------------------------------------------------------------------------------------
Gross deferred tax asset 6,781 9,236 5,968
Valuation allowance (6,781) (9,236) (5,968)
- --------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(e) Stock-based compensation:
The fair value of the employment options and non-employee options has
been estimated at the date of grant or re-issue using the
Black-Scholes option pricing model under the following assumptions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average risk free interest rate 5.54% 6.71% 6.00%
Dividend yield 0.00 0.00 0.00
Volatility factor of the expected market
price of the Company's common shares 0.90 0.90 0.90
Weighted-average expected life of the
employment options 2 years 2 years 2 years
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The resulting weighted-average, grant-date fair value of the
employment options and non-employee options issued in 1998 was $0.88
(1997 - $0.97).
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
10. Differences between generally accepted accounting principles (GAAP) in
Canada and the United States (continued):
While SFAS No. 123 does not require the recording of compensation
cost for stock options issued to employees at fair value, it does
require disclosure of pro forma net income and earnings per share
information as if the Company had accounted for employment options
issued in 1998, 1997 and 1996 under the fair value method, as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Loss for the year $ (7,415) $ (8,332) $ (5,066)
Compensation cost - employees (665) (797) (1,110)
- --------------------------------------------------------------------------------------------------------------
Pro forma loss for the year $ (8,080) $ (9,129) $ (6,176)
- --------------------------------------------------------------------------------------------------------------
Pro forma loss per share $ (0.32) $ (0.43) $ (0.49)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The effects of applying SFAS No. 123 to calculate compensation cost
in 1998, 1997 and 1996 may not be representative of the effects on
pro forma net income in future periods.
(f) Recent accounting pronouncements:
During 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130 "Reporting Comprehensive Income". This pronouncement,
which is solely a financial statement presentation standard, requires
the Company to disclose non-owner charges included in equity but not
included in net earnings. These charges include the fair value
adjustment to certain cost-based investments, the foreign currency
translation adjustments, and the minimum pension liability
adjustment. The Company will be required to implement SFAS No. 130
for its fiscal year ending November 30, 1999. The Company expects the
adoption of SFAS No. 130 will have no material impact on its
financial position, results of operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133
established methods of accounting for derivative financial
instruments and hedging activities related to those instruments as
well as other hedging activities. The Company will be required to
implement SFAS No. 133 for its fiscal year ending November 30, 1999.
The Company expects the adoption of SFAS No. 133 will have no
material impact on its financial position, results of operations or
cash flows.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)
Years ended November 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
10. Differences between generally accepted accounting principles (GAAP) in
Canada and the United States (continued):
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". SOP 98-5 requires that all start-up costs
related to new operations must be expensed as incurred. In addition,
all start-up costs that were capitalized in the past must be written
off when SOP 98-5 is adopted. The Company will be required to
implement SOP 98-5 for its fiscal year ending November 30, 1999. The
Company expects that the adoption of SOP 98-5 will have no material
impact on its financial position, results of operations or cash
flows.
11. Subsequent events:
(a) Private placement:
Subsequent to year end, the Company raised $1,625,000 from a private
placement of 1,300,000 common shares at a price of $1.25 per common
share.
(b) Public offering of common shares:
Pursuant to a preliminary prospectus dated February 24, 1999, the
Company is offering 5,290,000 common shares, issuable without
additional payment upon the exercise of 5,290,000 special warrants
previously issued by the Company during February 1999 pursuant to
prospectus exemptions. The Company raised $8,199,500, before offering
costs, from the special warrants placement. Each special warrant
entitles the holder thereof to acquire one common share.
The Company has also granted the underwriters 250,000 brokers'
special warrants exercisable for no additional consideration to
acquire compensation options. Each compensation option is exercisable
to acquire one common share at an exercise price of $2.00 per share
for a period of eighteen months following February 22, 1999.
17
