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)
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 - 35,591,912 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 Busines(1).
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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 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 inflammatory processes involved
in a number of major diseases. In collaboration with independent, international
biomedical research centres, the Company has immune modulation therapies in
development for the prevention and treatment of inflammatory disorders including
atherosclerosis, congestive heart failure, autoimmune diseases, and for the
prevention or amelioration of ischemia/reperfusion injury. Vasogen is also
developing a process for treating donor T cells 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 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. Confidentiality agreements are used to protect against improper
use and disclosure of the Company's confidential information. 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 five issued patents and fourteen
patent applications.
The Company intends to commercialize its therapies through licensing
agreements with established healthcare companies. To date, the Company has
received no revenues from any of its product lines.
For the two fiscal years ended November 30, 1999 and 1998, the Company
spent a total of $4,672,486 Cdn(2) and $4,656,643 Cdn., respectively, on
research and development.
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(1) See Glossary on pages 19-20 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.
Average Low - High Year End
1995 .7305 .7023 - .7527 .7323
1996 .7332 .7140 - .7472 .7301
1997 .7223 .7020 - .7487 .7020
1998 .6743 .6311 - .7123 .6523
1999 .6705 .6441 - .6912 .6788
<PAGE>
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 March 27, 2000, one Canadian dollar, as quoted by National Bank at
9:00 a.m., for foreign exchange cash selling rates was $0.6838 in U.S. dollars.
Corporate History
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Vasogen Inc. ("Vasogen" or the "Company") was incorporated under the
Business Corporations Act (Ontario) by articles of incorporation dated January
10, 1980, as amended by articles of amendment dated September 19, 1985, June 15,
1988, and April 21, 1994, and was continued under the Canada Business
Corporations Act by Certificate and Articles of Continuance dated August 9,
1999. The Company has one wholly-owned subsidiary, Vasogen Ireland Limited, a
company incorporated under the laws of Ireland, which is the holder of the
Company's technology.
Immune Modulation Therapy
- -------------------------
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, with fewer side effects, than
current therapies. The administration of these therapies involves the withdrawal
of a small sample of a patient's blood, the subsequent processing of the
patient's blood and the administration of the processed blood to the patient.
The procedure can be performed in 30 minutes. A course of therapy involves a
series of these 30-minute procedures administered on an outpatient basis.
Delivery Technology
- -------------------
The Company is developing medical device technologies for the delivery
of immune modulation therapies and for the processing of donor T cells. These
medical devices are designed to apply a number of physicochemical stress factors
to a sample of a patient's own blood or donor T cells. The current systems
employ a single use disposable unit, which contains the patient's blood or donor
T cells during processing.
Products
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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 atherosclerosis, VAS971 for the prevention or amelioration of
ischemia/reperfusion injury, VAS972 for the treatment of autoimmune disease, and
VAS991 for the treatment of congestive heart failure. The Company is also
developing VAS981 for treating donor T cells to prevent GvHD. Each of these
therapies (VasoCare(TM), VAS971, VAS972, VAS981, VAS991) involve the application
of a specific combination of physicochemical stress factors to a patient's blood
or donor T cells using the medical devices developed by the Company.
<PAGE>
VasoCare(TM) Therapy and Atherosclerosis
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VasoCare(TM) therapy is being developed for the treatment and
prevention of atherosclerosis, the most common underlying cause of
cardiovascular disease. Cardiovascular disease is the leading cause of death and
disability in the western world. The disease (atherosclerosis) generally results
in narrowing of the arteries, 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 is characterized by the build-up of fat-containing
plaque within blood vessel walls, which leads to progressive narrowing of
arteries, particularly common in the coronary circulation. 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 damage to and 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 the presence of the oxidized LDL molecules in the wall of
the blood vessel is, in turn, one factor that attracts the leukocytes to the
site. However, elevated blood cholesterol levels only occur in about one-half of
patients with atherosclerosis.
Researchers now generally agree that there is a significant
inflammatory component in atherosclerosis and there is considerable experimental
evidence of pro-inflamatory T-cells in plaque, even at the earliest stages of
development. Inflammation processes appear to play an important role in the
progression of the atherosclerotic process referred to as atherogenesis.
Inflammation may also be associated with plaque instability and lead to plaque
rupture, resulting in thrombosis and the severe clinical consequences such as
myocardial infarction (heart attack) and stroke.
Vasogen is initially developing VasoCare(TM) therapy for the treatment
of peripheral vascular disease ("PVD"), a serious form of atherosclerosis 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 percent 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.
164). Management estimates that surgery for PVD costs healthcare 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 atherosclerosis, the underlying
cause of the disease, thereby reducing symptoms and thus the need for surgical
intervention. As well, VasoCare(TM) therapy may increase plaque stability, thus
potentially reducing the cardiovascular complications associated with PVD. The
therapy may also improve walking distance, reduce pain and improve quality of
life.
<PAGE>
During 1998 and 1999, Vasogen completed pre-clinical studies in a
standard animal model of atherosclerosis directed by Dr. Duncan Stewart, Head of
the Division of Cardiology, St. Michael's Hospital at the University of Toronto.
The results showed a substantial and significant (p<0.05) reduction in plaque
area in VasoCare(TM)-treated animals. Based on these results, the Company filed
certain patent applications with the United States Patent Office in respect of
preventing and reversing atherosclerosis.
One key factor in the initiation of atherosclerotic plaque formation is
believed to be a dysfunction of the endothelial cells that line the blood vessel
walls. In 1999, Vasogen completed a double blind placebo-controlled clinical
study at the University of Lund, Sweden under the direction of Dr. Lars
Edvinson, Department of Internal Medicine, on 18 patients with peripheral
arterial occlusive disease. In this study, the rate of recovery of skin blood
flow was measured following occlusion with a blood pressure cuff. The results
showed a significant increase in blood flow recovery (p<0.05, paired t-test) in
the VasoCare(TM)-treated patients. There were no reports of significant adverse
side effects associated with VasoCare(TM)
An initial open clinical study at the Bristol Royal Infirmary,
University of Bristol, U.K., 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. On the basis of this study, the Company initiated
a controlled randomized double-blind clinical study in PVD at the Universities
of Bristol and Dundee, U.K. in 1998. This study has been fully enrolled.
The Company has also conducted research into 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% improvement in the severity of patients' symptoms. The improvement in
the VasoCare(TM) -treated group was double that of the 24% 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>
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. Ischemia and reperfusion cause damage to organs and tissues, which is
documented to result from an inflammatory response mediated by cytokines.
(Daemen, MARC et al (1999) Involvement of endogenous interleukin-10 and tumor
necrosis factor-alpha have been implicated in renal ischemia-reperfusion injury.
Transplantation 67: 792-800)
Three surgical interventions that result in I/R injury are coronary
artery bypass graft ("CABG") procedures, abdominal aortic aneurysm ("AAA")
repair surgery and thoracic abdominal 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 thoraco
abdominal 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.
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 healthcare 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.
<PAGE>
Using an animal model system in which a balloon catheter is inserted
into the thoracic aorta and inflated to occlude the blood flow - to mimic TAA
surgery-VAS971 was shown to reduce subsequent damage to both liver and to
skeletal muscle. These results, obtained in 1999 by Dr. Chen, demonstrate that
the organ protection effected by VAS971 can extend to other organs in addition
to the kidney.
Dr. Chen's and Dr. Tremblay's research has also 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).
In Dr. Tremblay's experiments, the degree of cell death by apoptosis
was measured by DNA laddering. The degree of DNA laddering correlates with the
amount of apoptosis in a tissue. The results showed that there was a lower level
of DNA laddering (by 60%, P<0.05) in the kidney 12 hours following ischemia
reperfusion in VAS971-treated animals compared to controls. These results
confirm a lower level of apoptosis in animals receiving VAS971 therapy before
surgery.
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).
Vasogen has recently commenced a clinical study at Baylor College of
Medicine in patients undergoing TAA repair. Success in the TAA repair indication
could also lead to the commercial development of VAS971 for other major vascular
surgery indications, including abdominal aortic aneurysm repair and coronary
artery bypass graft surgery, where the incidence of I/R related injury is
significant.
<PAGE>
VAS972 and Autoimmune Disease
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VAS972 is being developed for the treatment of autoimmune disease.
Autoimmune diseases affect over 80 million people throughout the world. Many
autoimmune diseases are characterized by an imbalance between the different
types of T cells, 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 one 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 $US3, 300-$US3,800
(Gabriel et al. 1997. Direct medical costs unique to people with rheumatoid
arthritis, 1997 Journal of Rheumatology 24: 719-725).
Psoriasis is also 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 skins 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 10
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 in the United States (American
Autoimmune Related Diseases Association Inc. website - www.aarda.org, National
Psoriasis Foundation website).
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 T cells 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.
Vasogen believes that the increase in the proportion of Th2 cells to
Th1 cells observed following the administration of VAS972 seen 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.
<PAGE>
Based on these findings, the Company has initiated a series of
pre-clinical studies in models of autoimmune/inflammatory disease at the
University of Toronto. A significant reduction (by 45-50%, p<0.05) in ear
swelling in the contact hypersensitivity response, a known Th1-mediated
inflammatory reaction, has been measured in animals treated with VAS972.
These results have supported the successful regulatory application to conduct a
double blind placebo-controlled clinical study in psoriasis, which has commenced
at the Sunnybrook and Women's College Health Sciences Centre, University of
Toronto, under the direction of Dr. Daniel Sauder, Chief of Dermatology.
VAS981 and Graft-versus-Host-Disease
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VAS981 is being developed for treating T cells 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 and radiotherapy, which
severely damage the bone marrow. Bone marrow can be replaced through a procedure
known as bone marrow transplantation ("BMT"). GvHD is a life-threatening
complication of BMT. It occurs when T cells in the donated marrow (graft)
identify cells of the recipient's body (host) as foreign and attack them. The
disease causes symptoms related primarily to the skin, bowel, and liver of the
recipient.
The ability to treat the donor T cells to prevent GvHD could have major
beneficial implications for the treatment of certain forms of cancer by
increasing the number of patients who could become candidates for life saving
BMTs. The economic impact of GvHD is also significant, with treatments for
severe GvHD complications costing upwards of $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 suitably matched
donor (HLA identical twin) can be found, bone marrow transplantation is
accompanied by GvHD, when 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 has completed the first stage of pre-clinical studies in
GvHD at the Ontario Cancer Institute and the Sunnybrook Health Sciences 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. These studies have demonstrated the ability of VAS981
therapy to markedly decrease the incidence and severity of GvHD in these model
systems. Parallel laboratory studies on human T cells have also been completed.
Based on the results of this work, certain patent applications pertaining to
methods of alleviating GvHD have been filed in various jurisdictions.
The Company has received ethics committee approval and Health Canada
approval to initiate a clinical study to use VAS981 to process donor T cells
prior to their infusion as part of the treatment of serious leukemia/lymphoma
patients requiring bone marrow transplants. This study will be directed by Dr
Hans Messner, Director of the Bone Marrow Transplant Programme, Princess
Margaret Hospital, University of Toronto.
<PAGE>
VAS991 and Congestive Heart Failure
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Nearly five million Americans suffer from congestive heart failure
("CHF") and its prevalence is increasing at ten percent per year, primarily due
to the aging population, as well as improved long-term survival in heart disease
patients. CHF occurs when the pumping function of the heart is insufficient to
meet the body's demand for oxygen and other nutrients. With prolonged inadequate
blood supply to vital organs and voluntary muscles, a number of compensatory
mechanisms develop initially, leading to salt and water retention, worsening
heart function, and eventually symptoms of shortness of breath, fatigue, and
swelling of the legs. The condition is usually progressive, becomes
irreversible, and ultimately results in death.
CHF is now recognized to be a systemic disorder characterized by a
number of factors including: generalized dysfunction of the endothelial cells
lining blood vessels, inflammation secondary to immune activation of the Th1
cell type, and an increased death rate of heart muscle cells by the apoptotic
cell death process. Vasogen's immune modulation therapies have been shown
experimentally to have a beneficial impact on each of these pathological
processes.
The Company has received FDA approval for a placebo-controlled,
double-blind clinical trial and plans are underway to initiate this trial at two
U.S. cardiovascular centres: The Cleveland Clinic, under the direction of Dr.
James Young, Medical Director of the Kaufman Center for Heart Failure; and
Baylor College of Medicine, under the direction of Dr. Guillermo Torre, Medical
Director of the Heart Transplant Service.
Competitive Environment
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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
<PAGE>
Company seeks patent protection in various commercial jurisdictions of the
world; for example, the Company currently has five issued patents and fourteen
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), a method of increasing the concentration
of nitric oxide in a human (1998) and the treatment of autoimmune disease
(1999). 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 technologies for the delivery of immune
modulation therapies and for the processing of donor T cells are designed and
manufactured under the Company's quality system, which is registered to ISO9001
and EN46001. 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 Quality System Regulations (QSR) and other regulatory requirements (see
"Government Regulation").
The manufacture and testing of the Company's medical device
technologies are currently subcontracted to suppliers and managed by Vasogen.
The technology consists of medical device systems that are designed to apply a
number of physicochemical stress factors to a sample of a patient's own blood or
donor T cells. The systems employ a single-use disposable vessel, which contains
the patient's blood or donor T cells during treatment. 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 ISO9001/EN46001 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 meets regulatory requirements.
Human Resources
- ---------------
At March 1, 2000, the Company had 21 full 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.
Regulation
- ----------
The Company's immune modulation therapies are produced by a medical
device utilizing a sample of the patient's own blood. The production of immune
modulation therapies involves the removal from the patient of a small quantity
of blood, the treating of the blood by applying physicochemical stress factors
<PAGE>
to it, and the administration of the treated 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 is 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 its technology for the production and
delivery of VasoCare(TM) therapy and its quality system was registered to
ISO9001:1994 and BS EN46001:1997 on February 3, 1998.
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 it 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 for the treatment of
autologous blood is subjected to regulation by the health authorities as medical
<PAGE>
devices. The regulatory classification for the Company's technology being
developed for the prevention of GvHD has not yet been 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.
Canada
In Canada, the Company's technology for the treatment of autologous
blood is subjected to regulation by the health authorities as medical devices.
The regulatory classification for the Company's technology being developed for
the prevention of GvHD has not yet been 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 devices under approved quality system
conditions and must validate the performance characteristics of the device to
ensure that the device performs safely, consistently and reliably.
<PAGE>
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 or 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
have extensive experience with, and understand the European and North American
regulatory requirements. They are continuing to develop the immune modulation
therapies 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.
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.
<PAGE>
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 healthcare
expenditures in most countries. However, those devices which reduce overall
healthcare costs will benefit by being adopted by the healthcare industry. The
Company's products are expected to be such devices.
(c) Potential Competition
- -------------------------
The medical device industry is not a static environment and market
share can change rapidly if competing products are introduced. There can be no
assurances that the Company can avoid intense competition from other medical
technology companies and other technological advances, which could render the
Company's technology uneconomical or obsolete.
(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 does 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
<PAGE>
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,
required disputed rights to be licensed from third parties or require the
Company to cease using such technology.
(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 that 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 Companys future capital requirements will depend on many
factors, including continued scientific progress in its research and development
<PAGE>
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
Companys 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 2001.
(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.
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
- ------------------------
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. Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 Issue that may affect the entity, including
those related to customers, suppliers, or other third parties, have been fully
resolved. The Company has not experienced any material impacts on its operations
to date as a result of the Year 2000 Issue.
(l) Dilution
- ------------
As a business having no sales or revenues, Management anticipates that the
Company will be dependent over the foreseeable future upon securing additional
financing, of which there can be no assurance. In order to obtain additional
<PAGE>
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 Companys
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.
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 Companys preclinical studies and clinical
trials will be indicative of future clinical trial results. A commitment of
substantial resources to conduct time consuming research, pre-clinical studies,
and clinical trials will be required if the Company is to complete development
of its products. Delays in planned patient enrollment in the Companys 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 Companys 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 Companys products. The appearance of any
such unacceptable toxicities or side effects could interrupt, limit, delay, or
abort the development of any of the Companys 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
<PAGE>
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, 1999, the Company had an accumulated deficit of
approximately $37.31 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.
(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 Companys success may depend in part on its ability to obtain patent
protection for its products and processes. There can be no assurance that the
Companys 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 Companys patents are issued, or issued with limited
coverage, others may receive patents which contain claims applicable to the
Companys product. There can be no assurance that any of the Companys 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 be held 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 Companys trade secrets will not otherwise
become known or independently discovered by its competitors. It is possible that
the Companys 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
<PAGE>
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 Companys strategy for the research, development, and
commercialization of its products requires entering into various arrangements
with corporate collaborators, licensors, licensees, and others, and the Companys
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.
(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 Companys 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 Companys 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 Companys
inability or reduced capacity to manufacture its products would have a material
adverse effect on the Company's business and results of operations.
<PAGE>
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 Companys potential dependence upon third parties for the
manufacture of its products may adversely affect the Companys 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 Companys 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 Companys 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 healthcare
products, and there can be no assurance that adequate third party coverage will
be available.
(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.
<PAGE>
(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 Companys 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 pre-clinical
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 Companys collaborators, developments concerning patent or other
proprietary rights of the Company or its competitors (including litigation),
concern as to the safety of the Companys products, period-to-period fluctuations
in the Companys operating results, changes in estimates of the Companys
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).
Amelioration: A reduction in the severity of as in "his symptoms
were ameliorated"
Apoptotic Cell Death: A form of cell death in which a cell
causes its own death (suicide) usually because it has
been injured or when it dies of "old age" as opposed
to cell death from direct injury, which is called
necrosis
Atherosclerosis: Deposits of fat (cholesterol) in the walls of
arteries--causes obstruction and/or thrombosis.
Autoloqus Blood: The patient's own blood
Autoimmune: A reaction of the body's immune cells against its own
cells.
Balloon Angioplasty Dilation of a narrowed coronary artery by an
expandable 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.
Diastolic Blood Pressure: Lower half of blood pressure
systolic/diastolic (the actual BP when the heart is
not contracting and depends on the degree of
constriction of the peripheral arterioles small
arteries).
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 Dysfunction: Failure of the endothelium to perform its normal
function.
<PAGE>
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.
Physicochemical: A reaction or process based on both the physical and
chemical properties of the respective ingredients.
Platelets: Small cells in the blood required for blood clotting.
Raynaud's Disease: Excessive constriction of digital blood vessels on
exposure to cold, leading to pain and numbness.
Rheumatoid Arthritis: An autoimmune disease which causes arthritis (joint
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 levels A measure of kidney function.
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.
Thrombosis: Formation of a blood clot
Vasoconstrictor: Causes blood vessels to narrow.
Vascular: Pertaining to blood vessels.
* * * * * * * * * * * * *
<PAGE>
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 20, 2000, there were 39,453,887 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 March 14, 2000, officers and directors, as a group, owned 1,183,386
shares of the Company.
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 Toronto Stock Exchange in
Canada on July 22, 1999. The Toronto Stock Exchange is the primary trading
market for the Company's Shares. The Company's shares also trade, on a limited
basis, on The American Stock Exchange starting on November 22, 1999. From July
5, 1996 to July 22, 1999, the Company's shares were traded on The Montreal
Exchange. 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 Toronto Stock Exchange or The
Montreal Exchange for 1998, 1999, and the first quarter of 2000 (stated in
Canadian dollars):
High Low Volume
1998
1st Quarter 2.30 1.30 3,196,000
2nd Quarter 2.25 1.10 2,237,000
3rd Quarter 1.88 0.81 1,390,000
4th Quarter 1.55 0.81 2,079,000
1999
1st Quarter 2.29 1.10 3,388,000
2nd Quarter 2.10 1.49 2,010,000
3rd Quarter 1.89 1.30 3,223,000
4th Quarter 7.17 1.78 24,200,000
<PAGE>
High Low Volume
2000
1st Quarter 15.80 4.55 26,110,000
The closing sales price of the Shares on The Toronto Stock Exchange on
April 20, 2000 was $7.90.
The following is a summary of trading, on a quarterly basis, in the
Shares on The American Stock Exchange for 1999 and the first quarter of 2000
(stated in United States dollars):
High Low Volume
1999
4st Quarter 4.81 3.375 98,900
2000
1st Quarter 10.81 3.25 2,592,000
The closing sales price of the Shares on The American Stock Exchange on
April 20, 2000 was $5.125.
At April 20, 2000, the Company had 569 shareholders of record. At April
20, 2000, there were 30 United States shareholders of record, holding 1,107,897
Shares, which represents 2.8% 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.
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
<PAGE>
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.
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.
<PAGE>
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.
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").
<PAGE>
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 a 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 include 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 8 to the financial statements, conform in all
material respects with accounting principles generally accepted in the United
States.
Years ended November 30
- -----------------------
<TABLE>
<CAPTION>
(in thousands of dollars except
for per share data) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Research & development 4,672 4,656 5,351 3,167 1,496
Other expenses 3,243 2,656 2,640 1,695 827
Loss for the period (7,915) (7,312) (7,991) (4,862) (2,323)
Loss per share (0.25) (0.29) (0.38) (0.38) (0.27)
Working capital 8,224 4,807 7,188 5,426 1,644
Total assets 11,387 7,490 9,470 7,696
3,550
Share capital 47,752 36,139 31,172 21,541 12,735
Deficit (37,310) (29,395) (22,083) (14,092)
Shareholders' equity 10,442 6,744 9,089 7,449 3,505
</TABLE>
Notes:
(1) To date, the Company has been in the development stage and,
accordingly, has no revenue.
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 8 of the Company's audited financial
statement for the year ended November 30, 1999, 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.
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, 1999, 1998 and 1997:
<PAGE>
Fiscal Years Ended November 30
- ------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Research and development 4,859 4,631 5,225
Loss for the period (8,428) (7,415) (8,332)
Basic and diluted loss per share (0.27) (0.29) (0.39)
Total Assets 9,362 5,652 7,606
Share Capital 48,374 36,795 31,700
Deficit (40,317) (31,889) (24,474)
Shareholders' equity 8,057 4,906 7,226
</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 8, 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 of a series of immune modulation
therapies for the treatment of human disease. In collaboration with
international centres of excellence in biomedical research, the Company is
developing proprietary therapeutics for the prevention and treatment of
inflammatory disorders, including atherosclerosis, congestive heart failure,
autoimmune diseases (psoriasis and rheumatoid arthritis), and
ischemia/reperfusion injury resulting from major vascular surgery. Vasogen is
also developing a proprietary cell-processing technology to modify donor T cells
to prevent or reduce Graft-versus-Host Disease following bone marrow
transplantation. Delivered by a platform medical device technology, Vasogen's
therapies are designed to target fundamental disease-causing processes with
fewer side effects than current therapies. The Company currently has five issued
patents and fourteen patent applications. Vasogen intends to commercialize its
products through partnering with established health care companies.
During 1999, 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.
<PAGE>
Marketing the Company's products outside the European Community, or
offering it for the treatment of disease indications other than peripheral
vascular disease within the European Community, may 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 the research and development phase and as such, has
incurred losses since its inception. For the fiscal year ended November 30,
1999, the Company recorded a loss of $7.9 million, or $0.25 per common share, as
compared with a loss of $7.3 million or $0.29 per common share, for the fiscal
year ended November 30, 1998.
Research and development expenses, including costs associated with
pre-clinical and clinical research, product development, and regulatory affairs,
in fiscal 1999, were essentially the same as compared to fiscal 1998. The major
expenditures for research and development expenses during 1999 were directed at
moving the Company's products through pre-clinical development and into clinical
trials. By the end of fiscal, 1999, the Company had three products in clinical
trials and had completed pre-clinical development on a fourth and began
preparing to move it into a clinical trial.
General and administration expenses increased by $0.4 million, as
compared to fiscal 1998. The increase in general and administrative expenses
related to a significant increase in corporate activity during 1999. These
activities included the listing of Vasogen's shares on The Toronto Stock
Exchange and The American Stock Exchange. Vasogen also increased investor
relations' expenses during 1999 to increase the awareness of the Company's
activities in the investment community in Canada and to initiate a program in
the United States.
Professional fees increased by $0.1 million in fiscal 1999, as compared
to fiscal 1998. 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 1999 was associated with the increased
corporate activity described above.
Salary expenses increased by $0.1 million, as compared to fiscal 1998.
The increase in salary expense in 1999 was the result of higher expenses during
1999 required to support the Company's growth.
Liquidity and Capital Resources
- -------------------------------
As at November 30, 1999, the Company had cash equivalents and
marketable securities of $8.6 million, versus $5.2 million at the end of the
previous year. Cash equivalents consist of certificates of deposit. Marketable
securities include liquid bonds with varying maturities issued by Canadian
governments and corporations.
Cash used for operations in fiscal 1999 was $7.4 million, compared to
$6.9 million in fiscal 1998. This increase resulted from the increased corporate
activity in fiscal 1999 as described above.
<PAGE>
Cash provided from financing activities during fiscal 1999 was $11.4
million, compared to $4.9 million in fiscal 1998. The Company completed private
placements for proceeds of $8.9 million net of share issue costs. A total of
6,590,000 Common Shares was issued in connection with these placements.
Additional funding was generated through the exercise of warrants and options,
for proceeds of $2.5 million, which resulted in the issuance of 2,220,863 Common
Shares. During 1999, 206,939 Common Shares valued at $0.3 million were issued
for services provided to the Company.
As at November 30, 1999, the Company had no long-term obligations.
Year 2000
- ---------
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. Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 Issue that may affect the entity, including
those related to customers, suppliers, or other third parties, have been fully
resolved. The Company has not experienced any material impacts on its operations
to date as a result of the Year 2000 Issue.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.
- ---------------------------------------------------------------------
The Company's primary market risk exposures are interest rate risk and
foreign currency risk.
The Company is exposed to interest rate risk on its cash and short-term
deposits.
The Company's reporting currency is the Canadian dollar. The Company is
exposed to foreign exchange risk associated with purchases from U.S. suppliers.
The Company does not hedge its exposure to foreign exchange risk. Gains and
losses resulting from the effects of changes in the U.S. dollar to Canadian
dollar exchange rate are recorded in income.
The Company does not utilize derivative financial instruments to hedge
its interest rate or foreign currency rate risks.
<PAGE>
Interest rate risk
- ------------------
The following table sets out the weighted average interest rate risks
and maturities of the Company's cash and short-term deposits at March 31, 2000:
<TABLE>
<CAPTION>
Expected to mature in
2000 2001 2002
Cash and short-term deposits:
<S> <C> <C> <C>
Canadian Dollars 18,637,096 5,234,299 686,200
Average interest rate - fixed 5.64% 5.64% 5.84%
U.S. Dollars 1,116,125 N/A N/A
Average interest rate - fixed N/A N/A N/A
</TABLE>
Exchange rate sensitivity
- -------------------------
The Company does not have any material assets and liabilities at March
31, 2000 that are denominated in U.S. dollars and subject to exchange rate risk.
Limitations
The above discussion includes only those exposures that exist as of
March 31, 2000 and as a result, does not consider exposures or positions that
could arise after that date. The Company's ultimate realized gain or loss with
respect to interest rate and exchange rate fluctuations will depend on the
exposures that arise during the period, the Company's hedging strategies at the
time, and interest and foreign exchange rates.
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 3, 2000.
<PAGE>
<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
Oakville, Ontario
- --------------------------------------------------------------------------------------------------------
William R. Grant * Director and Vice-Chairman of the Board and November 1998
New York, NY Chairman of Galen Associates
- --------------------------------------------------------------------------------------------------------
Terrance Gregg,+ Director of the Company and President and September 1999
Los Angeles, CA Chief Operating Officer of MiniMed Inc.
- --------------------------------------------------------------------------------------------------------
Donald Grilli + Director of the Company and Health Care July 1999
Boston, MA Consultant
- --------------------------------------------------------------------------------------------------------
Graham Strachan + Director of the Company and Life Sciences September 1998
Etobicoke, Ontario Consultant
- --------------------------------------------------------------------------------------------------------
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 the President of January 1997
Montreal, Quebec Semafo Inc.
- --------------------------------------------------------------------------------------------------------
Jan-Eric Osterlund * Director of the Company and the Chairman of February 1997
London, United Kingdom QueQuoin Holdings Ltd.
- --------------------------------------------------------------------------------------------------------
Christopher J. Waddick Vice-President, Finance, Chief Financial March, 1997
Chatham, Ontario Officer, Corporate Secretary and Treasurer
- --------------------------------------------------------------------------------------------------------
</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 1991. 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, Vice-Chairman of the Board and 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. Mr. Grant was appointed as the Vice-Chairman of
the Board of the Company on March 3, 2000.
Terrance H. Gregg, Director
Mr. Gregg is the President and Chief Operating Officer of MiniMed Inc., a world
leader in diabetes management systems. Prior to joining MiniMed Inc., Mr. Gregg
served in executive positions with Smith & Nephew plc., a diversified health
care product company, and Allergan Inc., a leading ophthalmic device and
pharmaceutical company. He currently serves as a Health Advisory Board Member of
the School of Policy, Planning and Development at the University of Southern
California, and as an Advisory Council Member of the San Fernando Valley
Economic Research Center at the California State University Northridge.
<PAGE>
Donald A. Grilli, Director
Mr. Grilli has more than thirty years experience with Johnson & Johnson ("J&J"),
a diversified health care product company having held senior executive positions
with seven J&J companies, most recently, as President of Johnson & Johnson
Professional, Inc. Mr. Grilli also served as Executive Vice President of J&J's
Surgikos, a $500 million manufacturer of disposable products for the operating
room, as Executive Vice President of Sales and Marketing for J&J's Ultrasound
Division, and in various executive roles with J&J's Technicare, a global high
tech manufacturer of CT scanners, MRI units and nuclear equipment.
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.
Jan-Eric Osterlund, MMech Eng, MBA, Director
Mr. Osterlund is chairman of QueQuoin Holdings Ltd., an UK investment group
specializing in medical venture capital. He is also chairman of Phairson Medical
Ltd., a biotechnology group; Stril AB, a leader in radiation sterilization; and
BM Research and Epivac Ltd., both of whom specialize in drug delivery systems.
Mr. Osterlund is a Director of Ermitage International Ltd., a money management
company; Shilling Banco Ltd., an UK commercial real estate investment company;
and Ostrumentia, a Swedish commercial real estate investment company. Mr.
Osterlund is also a Director of Indigo Aviation, 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 in 1988, became its Chairman
and later sold the group in 1992.
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. Dr. Smith has
been at the University of Calgary since 1980. 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.
<PAGE>
Graham Strachan, Director
Mr. Strachan is a member of the Board of Directors of Allelix Biopharmaceuticals
Inc. and formerly President and Chief Executive Officer. Mr. Strachan was
involved in the formation of Allelix in 1983 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. Christopher J. Waddick, MBA, CMA, Vice-President, Finance,
Chief Financial Officer, Corporate Secretary and Treasurer
As Chief Financial Officer since 1997, Mr. Waddick is responsible for managing
the Company's financial and corporate affairs. Mr. Waddick has over fifteen
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. Mr. Waddick served in various financial roles
with Union Gas Limited from 1989 to 1997. 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.
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.
<PAGE>
Richard G. Margolese, MD, FRCS(C)
Dr. Margolese is the Hebert Black Professor of Surgical Oncology at McGill
University and the Director of the Department of Oncology at Sir Mortimer B.
Davis-Jewish General Hospital in Montreal. Internationally recognized for his
leadership in both cancer research and treatment, he is the author of numerous
important scientific publications and has served on the review and editorial
boards of most major oncology journals. Dr. Margolese has served as Chairman of
the Treatment Committee of the Breast Cancer Task Force at the National Cancer
Institute (U.S.A.) and he is the Chairman of the Surgical Committee at the
National Surgical Adjuvant Breast Project, a position he has held for the past
20 years. He has served as President of the National Cancer Institute of Canada,
as Chairman of Cancer 2000, a Federal and Provincial Task Force on Cancer
Control, and as Chairman of the Management Committee of the Canadian Breast
Cancer Research Initiative. Dr. Margolese is the recipient of numerous awards
including the Order of Canada, and, most recently, the R.M. Taylor medal of the
Canadian Cancer Society for the year 2000.
Richard G. Miller, PhD, FRSC
Dr. Miller is a Professor and Chairman of the Department of Medical Biophysics
as 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.
Craig M. Pratt, MD
Dr. Pratt is Professor of Medicine and Director of Clinical Cardiovascular
Research at Baylor College of Medicine, Houston, Texas. He is widely recognized
for his knowledge of FDA regulatory procedures, particularly in the area of
cardiovascular disease. From 1987 to 1993, Dr. Pratt was Chair of the
Cardiovascular and Renal Drugs Advisory Board of the U.S. Food and Drug
Administration. Since then, he has remained an active consultant to the FDA
Center for Drug Evaluation and Research. Dr. Pratt is also a leading authority
on the design and conduct of large multi-centre clinical trials in the field of
cardiology. He has acted as principal investigator or co-investigator for many
of the landmark trials that have led to fundamental changes in the management of
patients with heart disease. This includes numerous clinical trials sponsored by
the National Heart Lung and Blood Institute (NHLBI). In addition, Dr. Pratt has
consulted with most of the major pharmaceutical companies regarding various
aspects of clinical and regulatory drug development.
Robert Roberts, MD, FRCP(C), FACC, Chairman
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
<PAGE>
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.
Fred Rosen, MD
Dr. Rosen is President of the Center for Blood Research in Boston and Professor
of Pediatrics at Harvard Medical School. Dr. Rosen is recognized for his
ground-breaking research into the functioning of the immune system and the
causes of immune deficiency diseases. His wide scientific leadership in
immunology has led to fundamental insights into the mechanisms by which immune
responses are initiated. His work has been widely published in premier
scientific journals, such as Science, Nature, The Lancet, and The New England
Journal of Medicine. Dr Rosen has received wide international recognition as a
leader in his field. He has been elected as an honorary member to scientific
societies in many countries, including becoming a Membre d'Honneur for Life of
the French Society of Immunology, and is the recipient of numerous honorary
degrees and honours, including being a Distinguished Visiting Scholar, at
Christ's College, Cambridge University, England. Dr. Rosen is also active in
many important committees and scientific societies and currently chairs the
Scientific Advisory Committee of the Clinical Research Center, Children's
Hospital, Boston and the World Health Organization's Expert Scientific Committee
on Immunodeficiency.
David Wofsy, MD
Dr. Wofsy is the George A. Zimmerman Distinguished Professor of Medicine and
Microbiology/Immunology and Director of the Clinical Trials Center at the
University of California, San Francisco. He also serves as Chief of the
Rheumatology Section at the San Francisco Veterans Administration Medical
Center. Dr. Wofsy is a leading authority on the cellular and molecular
mechanisms underlying autoimmune diseases. Based on extensive research, he has
developed novel approaches to the use of immune modulation therapies in the
treatment of this very common group of diseases. Much of Dr. Wofsy's research
has been on systemic lupus erythematosus (SLE), an autoimmune disease, where he
was the first to demonstrate the key pathological role of CD4+T cells in a
standard animal model of this disease. His most recent research has extended to
additional novel methods for blocking T cell activation. These approaches are
currently in clinical trials. He is the author of numerous key publications and
book chapters, and serves on the editorial and advisory boards of several major
immunology journals. He has received many distinguished awards and his visiting
professorships include Harvard University and the National Institutes of Health.
<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, 1999, 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, 1999,
salary and bonus in excess of $100,000 ("Named Executive Officers").
Summary Compensation Table
- --------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
-----------------------------------
------------------------------------
Awards Payouts
------------------------------------
Restricted
Securities Shares
Other Under Or
Annual Options/ Restricted All Other
Compens- SARs Share LTIP Compen-
Name and Principal Position Year Salary Bonus (2) ation(5) Granted Units Payouts sation
($) ($) ($) (#) ($) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Elsley 1999 167,200 75,240 622,800(1)
(President and Chief 1998 167,200 63,954 687,800
Executive Officer) 1997 161,183 565,000
- ---------------------------------------------------------------------------------------------------------------------------
Paul Moore 1999 150,000 53,700 375,700(1)
(Executive Vice-President, 1998 150,000 47,325 405,700 62,499(3)
Chief Operating Officer(4)) 1997 131,000 330,000 61,067(3)
- ---------------------------------------------------------------------------------------------------------------------------
Christopher Waddick 1999 132,200 48,385 396,700(1)
(Vice-President Finance, 1998 132,200 41,709 346,700
Chief Financial Officer, 1997 124,067 25,000 280,000
Corporate Secretary and
Treasurer)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This is a cumulative total and represents the aggregate number of
securities under option as at November 30, 1999.
(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.
(4) On February 1, 2000, Mr. Moore was named to the position of Director of
Product Development and Marketing and ceased to be an Executive
Vice-President and the Chief Operating Officer of the Company.
(5) Perquisites and other personal benefits do not exceed the lesser of
$50,000 and 10% of the total of the annual salary and bonus for the
above-named officers.
<PAGE>
Employment Contracts
- --------------------
The Corporation 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 Corporation as its President and Chief
Executive Officer. The following is a 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 $180,000 per annum. Mr. Elsley
is entitled to benefits available to other employees of the Corporation. The
agreement is terminable at the option of the Corporation; 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 Corporation has entered into an employment agreement, made as of
the 1st day of February 2000, with Mr. Paul G. A. Moore. Pursuant to this
agreement, Mr. Moore serves the Corporation as its Director of Product
Development and Marketing. The agreement provides for a fixed two-year term and
an annual remuneration of $115,000 per annum. The agreement is terminable at the
option of the Corporation; however, if such agreement is not terminated for
cause, Mr. Moore is entitled to a lump-sum payment equal to six months' salary.
The other terms of the agreement are similar to those described for Mr. Elsley.
The Corporation has entered into 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 Corporation as its Vice President, Finance,
Chief Financial Officer and Secretary and Treasurer. The agreement provides for
an annual remuneration of $150,000 per annum. The other terms of the agreement
are similar to those described for Mr. Elsley.
Compensation of Directors
- -------------------------
Directors of the Corporation who are not full-time employees of the
Corporation are entitled to receive a fee of up to $1,500 for each meeting of
the Board and $500 for each meeting of any Committee thereof attended. Directors
are also entitled to be reimbursed for their reasonable out-of-pocket expenses
incurred on the business of the Corporation and are eligible to receive stock
options. For the fiscal period ended November 30, 1999, the Corporation paid
$27,000 in directors' fees, as well as reimbursement of reasonable travel
expenses.
Officers and directors, as a group, received total cash remuneration of
approximately $477,000 during the fiscal year ended November 30, 1999.
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 5,000,000 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 GRANT SECURITIES ON PRICE PER EXPIRY DATE
OPTIONED DATE OF GRANT SHARE
- ------------------------------------------------------------------------------------------------------------------------
Executive Officers
(Four)
<S> <C> <C> <C> <C> <C>
270,000 Sept. 15, 1998 1.00 1.00 Sept. 15, 2003
165,000 May 28, 1996 1.00 1.00 May 28, 2001
45,000 June 19, 1996 1.20 1.20 June 18,2001
205,055 Dec. 15, 1998 1.25 1.25 Dec. 15, 2003
100,000 June 19, 1996 1.20 1.20 June 18,2002
150,000 October 27, 1999 2.95 2.95 October 27, 2004
58,770 January 4, 2000 5.70 5.70 January 4, 2005
5,000 February 3, 2000 9.55 9.55 February 3, 2003
- ------------------------------------------------------------------------------------------------------------------------
Directors
(Excluding Executive
Officers) (Six)
10,000 August 4, 1999 1.75 1.75 August 4, 2002
30,000 February 3, 2000 9.55 9.55 February 3, 2003
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Other Employees Of
And Advisors To
The Company
(Fifteen)
35,000 May 7, 1998 2.00 2.00 May 7, 2003
196,385 Dec. 15, 1998 1.25 1.25 Dec. 15, 2003
125,000 Sept. 15, 1998 1.00 1.00 Sept. 15, 2003
15,000 May 1, 1997 2.30 2.30 May 1, 2002
100,000 May 28, 1996 1.00 1.00 May 28, 2001
100,000 June 19, 1996 1.20 1.20 June 18, 2002
14,750 May 26, 1999 1.55 1.55 May 26, 2004
125,000 January 8, 1997 1.69 1.69 January 8, 2002
25,000 August 4, 1999 1.75 1.75 August 4, 2004
68,290 January 4, 2000 5.70 5.70 January 4, 2005
10,000 February 3, 2000 9.55 9.55 February 3, 2005
75,000 October 27, 1999 2.95 2.95 October 27, 2004
- ------------------------------------------------------------------------------------------------------------------------
Other Persons Or
Corporations
(Twenty)
855,749 Mar. 10, 1998 1.75 1.75 Nov. 30, 2000
7,500 Jan. 2, 1996 1.15 1.15 Mar. 13, 2001
70,000 May 25. 1998 1.75 1.75 Nov. 30, 2000
55,000 Jan. 17, 1997 2.48 2.48 Jan. 17, 2001
47,500 August 19, 1999 1.75 1.75 August 31, 2001
10,000 October 27, 1999 2.95 2.95 October 27, 2004
30,000 November 17, 1999 4.03 4.03 November 17, 2001
7,500 January 4, 2000 5.70 5.70 August 31, 2001
30,000 January 4, 2000 7.40 7.40 June 4, 2002
94,000 Jan. 13, 1999 1.98 1.98 July 13, 2000
78,900 Feb. 24, 1999 2.00 2.00 Aug. 22, 2000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options/SARs Granted or Exercised During the Most Recently Completed
Financial Year
<PAGE>
Details of options granted to the Named Executive Officers during the
financial year ended November 30, 1999, 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>
David Elsley 122,792 19% $1.25 $1.25 December 15, 2003
- --------------------------------------------------------------------------------------------------------------------------
Paul Moore 75,720 12% $1.25 $1.25 December 15, 2003
- --------------------------------------------------------------------------------------------------------------------------
Christopher 66,735 26% $1.25 $1.25 December 15, 2003
Waddick 100,000 $2.95 $2.95 October 27, 2004
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Details of options exercised by the Named Executive Officers of the
corporations during the financial year ended November 30, 1999, are shown in the
table set out below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Unexercised Options/SARs at FY Value of Unexercised in-the-Money
Name Securities - End (#) Options/SARs at FY - End ($)
Acquired on Aggregate Exercisable/Unexercisable Exercisable/Unexercisable
Exercise Value Realized
(#) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Elsley 65,000 60,000 500,000/122,792 2,460,000/583,000
- --------------------------------------------------------------------------------------------------------------------------
Paul Moore 30,000 23,000 300,000/75,720 1,293,000/360,000
- --------------------------------------------------------------------------------------------------------------------------
Christopher Waddick 50,000 29,000 330,000/66,735 1,450,000/317,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 13. Interest of Management in Certain Transactions.
- ---------------------------------------------------------
(a) During the fiscal year ended November 30, 1999, 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.
(b) None of the officers or directors of the Company is indebted to the
Company or was indebted to the Company during the fiscal years ended November
30, 1999, 1998, and 1997.
<PAGE>
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, 1999, 1998, and 1997 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 8 conform in
all material respects with accounting principles generally accepted in the
United States.
<PAGE>
Item 19. Financial Statements and Exhibits.
- -------------------------------------------
1) Financial Statements.
a) Report and Consolidated Financial Statements for the years ended
November 30, 1999, 1998, and 1997 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 8 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 exhibit 3 (b) has 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
Exhibit 3 (c) has been previously filed with the Securities and Exchange
Commission on June 12, 1998 in the Company's Registration Statement on Form 20 -
F).
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 November 30, 1997 between Delvin Inc. and Vasogen
Inc.
d. Agreement dated September 29, 1999 between Delvin Inc. and
Vasogen Inc.
<PAGE>
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:
<PAGE>
Consolidated Financial Statements of
VASOGEN INC.
Year ended November 30, 1999
<PAGE>
Auditors' Report
To the Board of Directors of Vasogen Inc.
We have audited the consolidated balance sheets of Vasogen Inc. as at November
30, 1999 and 1998 and the consolidated statements of operations and deficit and
cash flows for each of the years in the three-year period ended November 30,
1999 and for the period from December 1, 1987 to November 30, 1999. 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 Canadian 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, 1999
and 1998 and the results of its operations and its cash flows for each of the
years in the three-year period ended November 30, 1999 and for the period from
December 1, 1987 to November 30, 1999 in accordance with Canadian generally
accepted accounting principles.
Chartered Accountants
/s/ KPMG LLP
- -------------
KPMG LLP
Toronto, Canada
December 17, 1999,
except for note 9 which is at February 29, 2,000
<PAGE>
<TABLE>
<CAPTION>
VASOGEN INC.
Consolidated Balance Sheets
(In thousands of Canadian dollars)
November 30, 1999, with comparative figures for 1998
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,031 $ 1,073
Marketable securities (note 2) 7,576 4,128
Inventory 117 243
Prepaid expenses and advances 445 109
- ------------------------------------------------------------------------------------------------------------------------------------
9,169 5,553
Capital assets 299 158
Less accumulated amortization (106) (59)
- ------------------------------------------------------------------------------------------------------------------------------------
193 99
Acquired technology 4,081 3,641
Less accumulated amortization (2,056) (1,803)
- ------------------------------------------------------------------------------------------------------------------------------------
2,025 1,838
- ------------------------------------------------------------------------------------------------------------------------------------
$ 11,387 $ 7,490
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 945 $ 746
Shareholders' equity:
Share capital (note 3) 47,752 36,139
Deficit (37,310) (29,395)
- ------------------------------------------------------------------------------------------------------------------------------------
10,442 6,744
- ------------------------------------------------------------------------------------------------------------------------------------
$ 11,387 $ 7,490
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Benoit La Salle Director
- ---------------------------------
BENOIT LA SALLE
/S/ Janeric Osterlund Director
- ---------------------------------
JANERIC OSTERLUND
<PAGE>
<TABLE>
<CAPTION>
VASOGEN INC.
Consolidated Statements of Operations and Deficit
(In thousands of Canadian dollars except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
Years ended November 30, November 30,
1999 1998 1997 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expenses:
Research and development $ 4,672 $ 4,656 $ 5,351 $ 21,209
Salaries 1,064 981 1,097 4,842
General and administration 1,224 822 813 5,427
Professional fees 908 821 717 4,026
Amortization of capital assets 47 32 13 296
- ------------------------------------------------------------------------------------------------------------------------------------
Loss for the period (7,915) (7,312) (7,991) (35,800)
Deficit, beginning of period (29,395) (22,083) (14,092) (1,510)
- ------------------------------------------------------------------------------------------------------------------------------------
Deficit, end of period $ (37,310) $ (29,395) $ (22,083) $ (37,310)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per share $ (0.25) $ (0.29) $ (0.38)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
VASOGEN INC.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
Years ended November 30, November 30,
1999 1998 1997 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash provided by (used in):
Operations:
Loss for the period $ (7,915) $ (7,312) $ (7,991) $ (35,800)
Items not involving cash:
Amortization of capital assets
and acquired technology 300 236 199 2,381
Loss on write-off of
capital assets - 6 - 24
Forgiveness of debt - - - (63)
Services provided for
common shares 259 55 215 2,216
Change in non-cash
working capital (note 4) (38) 59 83 288
- ------------------------------------------------------------------------------------------------------------------------------------
(7,394) (6,956) (7,494) (30,954)
Financing:
Shares issued for cash 9,825 5,043 7,625 33,232
Warrants exercised for cash 1,739 253 1,621 8,696
Options exercised for cash 724 95 482 2,120
Share issue costs (934) (479) (312) (3,174)
Issue of convertible debt - - - 650
Financing costs - - - (28)
Payable to related parties - - - (232)
- ------------------------------------------------------------------------------------------------------------------------------------
11,354 4,912 9,416 41,264
Investments:
Increase in capital assets (141) (100) (17) (487)
Increase in acquired technology (440) (178) (60) (1,283)
Maturities (purchase) of
marketable securities (3,448) 2,900 (7,028) (7,576)
- ------------------------------------------------------------------------------------------------------------------------------------
(4,029) 2,622 (7,105) (9,346)
Foreign exchange gain on cash held in
foreign currency 27 40 - 67
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (42) 618 (5,183) 1,031
Cash and cash equivalents,
beginning of period 1,073 455 5,638 -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
end of period $ 1,031 $ 1,073 $ 455 $ 1,031
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplementary disclosures (note 4)
See accompanying notes to consolidated financial statements.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
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, 1999.
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 8, 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. The functional currency of the Irish subsidiary
is the Canadian dollar.
(b) Marketable securities:
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 marketable
securities.
Marketable securities include bonds issued by Canadian governments
and predominantly crown corporations with varying maturities
generally ranging between six months and thirty-six months from the
date of purchase and which are capable of prompt liquidation. Market
value of these securities approximates cost.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
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. Amortization is provided on a
straight-line basis over 20 years, representing the period from the
acquisition date to the expiry date of the technology's initial
patent. On an ongoing basis, management reviews the carrying value
and amortization of the technology, taking into consideration any
events and circumstances that might impair its value.
(g) Stock-Based compensation plan
The Company has a compensation plan which is described in note 3 b),
c) and d). No compensation expense is recognized for these plans when
stock options or warrants are issued to employees. Any consideration
paid by employees on exercise of stock options, warrants or purchase
of stock is credited to share capital.
(h) 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.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
(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
revenue and expenses during the year. Actual results could differ
from those estimates.
2. Marketable securities:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
One
One year year plus Yield to
1999 maturity maturities Total maturity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Canadian federal government bonds $ 1,299 $ - $ 1,299 4.21% - 4.54%
Canadian provincial government
bonds 4,217 668 4,885 4.21% - 6.01%
Canadian corporate bonds 1,321 71 1,392 5.00% - 6.10%
- ------------------------------------------------------------------------------------------------------------------------------------
$ 6,837 $ 739 $ 7,576
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
One
One year year plus Yield to
1998 maturity maturities Total maturity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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>
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
3. Share capital:
(a) Authorized unlimited common shares, without par value:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
November 30,
1999 1998 1997 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Number of Number of Number of
shares Amount shares Amount shares Amount shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning
of year 26,574 $ 36,139 23,331 $ 31,172 18,307 $ 21,541 1,032 $ 1,213
Issued for:
Cash 6,590 9,825 2,882 5,043 3,064 7,625 21,669 33,232
Services 207 259 33 55 115 215 1,531 2,216
Technology - - - - - - 1,913 2,799
Warrants exercised 1,627 1,739 228 253 1,352 1,621 7,049 8,696
Options exercised 594 724 100 95 493 482 1,974 2,120
Debt conversion - - - - - - 424 650
Share issue costs - (934) - (479) - (312) - (3,174)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 35,592 $ 47,752 26,574 $ 36,139 23,331 $ 31,172 35,592 $ 47,752
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
3. Share capital (continued):
(b) Stock options:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year 2,435 2,481 1,629
Issued 766 569 1,345
Exercised (594) (100) (493)
Expired or cancelled (45) (515) -
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 2,562 2,435 2,481
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable, end of year 2,092 2,285 1,793
- ------------------------------------------------------------------------------------------------------------------------------------
</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, 1999, these options have exercise prices ranging from
$1.00 to $2.95, generally vest over a maximum period of two to three
years and expire over various dates to 2004.
(c) Warrants:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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 2,100 3,785 5,885 4,725 4,078
Issued 424 372 796 2,538 2,182
Exercised (632) (995) (1,627) (228) (1,352)
Expired or cancelled (200) (382) (582) (1,150) (183)
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 1,692 2,780 4,472 5,885 4,725
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable, end of year 1,524 2,780 4,304 5,885 4,585
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
3. Share capital (continued):
As at November 30, 1999, these warrants have exercise prices ranging
from $1.00 to $3.05 and expire over various dates to 2005. 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.
(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>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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 4,534 $ 1.37 4,445 $ 1.43 3,444 $ 1.08
Issued 766 1.62 804 1.25 1,745 1.84
Exercised (1,194) 1.18 (150) 1.01 (744) 1.05
Expired or cancelled (245) 1.52 (565) 2.23 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding,
end of year 3,861 $ 1.46 4,534 $ 1.37 4,445 $ 1.43
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable,
end of year 3,392 $ 1.40 4,385 $ 1.35 3,618 $ 1.31
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As at November 30, 1999, there were 246,952 (1998 - 380,798; 1997 -
569,798) employment options available for grant.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
3. Share capital (continued):
Employment options outstanding and exercisable as of November 30,
1999 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 Employment 1999 Employment
options outstanding options exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average
Exercise remaining
price Number contractual life Number
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
$ 1.00 - $1.15 1,430 2.1 - 2.7 1,430
1.16 - 1.55 1,347 0.6 - 4.5 908
1.56 - 1.90 649 1.0 - 3.8 629
1.91 - 2.63 225 0.8 - 3.4 215
2.64 - 2.95 210 0.5 - 4.9 210
- ------------------------------------------------------------------------------------------------------------------------------------
3,861 2.3 3,392
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4. Supplemental cash flow information:
(a) Change in non-cash working capital:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
Years ended November 30, November 30,
1999 1998 1997 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inventory $ 126 $ (243) $ - (117)
Prepaid expenses and advances (336) (23) (52) (413)
Accounts payable and accrued liabilities 199 365 135 885
Foreign exchange (27) (40) - (67)
- ------------------------------------------------------------------------------------------------------------------------------------
$ (38) $ 59 $ 83 288
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
4. Supplemental cash flow information (continued):
(b) Non-cash financing and investing activities:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Non-cash financing activity:
Debt conversion - - - (650)
Shares issued on debt conversion - - - 650
Shares issued for services 259 55 215 2,216
Shares issued for technology - - - 2,799
- ------------------------------------------------------------------------------------------------------------------------------------
259 55 215 5,015
- ------------------------------------------------------------------------------------------------------------------------------------
Non-cash investing activity:
Technology acquired for
shares issued - - - (2,799)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. Fair values 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.
6. 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, 1999 is approximately $7,445,000 (1998 -
$5,887,000).
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
6. Income taxes (continued):
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> <C>
2005 $ 128
2006 299
2007 404
2008 341
2009 533
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,705
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has losses of approximately $11,339,000 available to reduce
future taxable income, the benefit of which will be recognized in the
accounts when realized. These tax losses expire as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
2003 $ 3,058
2004 6,473
2006 1,808
- ------------------------------------------------------------------------------------------------------------------------------------
$ 11,339
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's subsidiary, Vasogen Ireland Limited, has losses of
approximately $8,564,191 available indefinitely to reduce future taxable
income, the benefit of which will be recognized in the accounts when
realized.
7. Commitments and contingency:
(a) Royalties:
The Company has granted royalties to arm's-length third parties on gross
amounts received by the Company on commercial sales of its products
comprising 1.5% on all sales to a maximum royalty of $1.3 million per
annum and an additional 4% with respect to revenue derived from VAS971.
To date, no royalties are due and/or payable.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
(b) 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.
8. 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>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
8. Differences between generally accepted accounting principles ("GAAP") in
Canada and the United States (continued):
(a) Consolidated statement of operations and deficit:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period from
December 1,
1987 to
Years ended November 30, November 30,
1999 1998 1997 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss per Canadian GAAP $ (7,915) $ (7,312) $ (7,991) $ (35,800)
Technology costs (i) (440) (179) (60) (4,081)
Technology amortization (i) 253 204 186 2,056
Non-employee stock options (ii) (326) (128) (467) (921)
Warrants issued to acquire
technology (iii) - - - (61)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per United States GAAP $ (8,428) $ (7,415) $ (8,332) $ (38,807)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share
under United States GAAP $ (0.27) $ (0.29) $ (0.39)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(In thousands)
<S> <C> <C> <C> <C>
Weighted average number of
shares under United States GAAP 31,131 25,416 21,360
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) Consolidated balance sheet:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
United United
Canada States Canada States
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Acquired technology (i) $ 2,025 $ - $ 1,838 $ -
Share capital (ii) (iii) 47,752 48,734 36,139 36,795
Deficit, end of year
(i) (ii) (iii) (37,310) (40,317) (29,395) (31,889)
Deficit accumulated
during development
stage (i) (ii) (iii) (35,800) (38,807) (27,885) (30,379)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
8. Differences between generally accepted accounting principles ("GAAP") in
Canada and the United States (continued):
(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 (FASB) 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 1999 has been estimated at the date of grant using the
Black-Scholes option pricing model based on the assumptions set
out in note 8(e).
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. 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 8(e).
(c) Consolidated statement of cash flows:
Cash from operations under United States GAAP includes the
adjustments (i), (ii) and (iii) to the loss for the year.
Cash used in investing activities under United States GAAP excludes
amounts representing acquired technology (adjustment (i)).
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
8. Differences between generally accepted accounting principles ("GAAP") in
Canada and the United States (continued):
(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 year.
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>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unclaimed technology costs $ 3,321 $ 2,413 $ 1,544
Loss carryforwards 5,497 4,368 7,692
- ------------------------------------------------------------------------------------------------------------------------------------
Gross deferred tax asset 8,818 6,781 9,236
Valuation allowance (8,818) (6,781) (9,236)
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
8. Differences between generally accepted accounting principles ("GAAP") in
Canada and the United States (continued):
(e) Stock-based compensation:
The fair value of the employment options and non-employee options has
been estimated at the date of grant or reissue using the
Black-Scholes option pricing model under the following assumptions:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average risk-free interest rate 6.19% 5.54% 6.71%
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 1999 was $1.05
(1998 - $0.88).
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 1999, 1998 and 1997 under the fair value method, as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss for the year $ (8,428) $ (7,415) $ (8,332)
Compensation cost - employees (675) (665) (797)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma loss for the year $ (9,103) $ (8,080) $ (9,129)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma loss per share $ (0.29) $ (0.32) $ (0.43)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The effects of applying SFAS No. 123 to calculate compensation cost
in 1999, 1998 and 1997 may not be representative of the effects on
pro forma net income in future periods.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)
Year ended November 30, 1999
- --------------------------------------------------------------------------------
8. Differences between generally accepted accounting principles ("GAAP") in
Canada and the United States (continued):
(f) Recent accounting pronouncements:
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. Application for this SFAS has been
postponed. As such, the Company will be required to implement SFAS
No. 133 for its fiscal year ended November 30, 2001. The Company
expects the adoption of SFAS No. 133 will have no material impact on
its financial position, results of operations or cash flows.
In 1999, the FASB issued SFAS No. 134 to No. 137. The Company expects
that the adoption of SFAS No. 134 to No. 137 will have no material
impact on its financial position, results of operations or cash
flows.
In 1999, the AICPA issued SOP 98-6 to 99-3. The Company expects that
the adoption of SOP 98-6 to 99-3 will have no material impact on its
financial position, results of operations or cash flows.
9. Subsequent event
In February 2000, the Company issued 1,725,000 Special Warrants at a
price of $9.00 per Special Warrant for proceeds of $15,325,000, net
of issuance costs of $200,000. Each Special Warrant entitles the
holder thereof to acquire one common share of the Company at no
additional cost.
Subject to adjustment, the Special Warrants are exercisable at any
time and will be automatically exercised following the issuance of a
receipt for the final prospectus qualifying the common shares to be
issued upon exercise of the Special Warrants.
<PAGE>
DELVIN LIMITED
POB 404 Whiteley Chambers, Don Street
St. Helier, Jersey JE 9 WG Channel Island
September 29, 1999
Confidential
Vasogen Ireland Limited
Shannon Airport House
Shannon, Co. Clare
Ireland
Dear Sirs:
RE: Agreement dated November 1, 1997 between Vasogen Ireland Limited ("VIL") and
Delvin Ltd. ("Delvin") (the "Agreement")
This letter confirms that upon payment to Delvin on or before October 8, 1999 of
$160,044 (taking into account the discount of $36,000 for early payment) the
Royalty payable to Delvin pursuant to the agreement will equal 1.5% of the gross
amount actually received, directly or indirectly, by Vasogen or any subsidiary
thereof on the commercial sale of products by Vasogen or any subsidiary thereof
which incorporate the Technology (as such term is defined in the Agreement).
This letter also confirms that upon payment to Delvin on or before October 8,
1999 of $160,044 the Royalty payable to Delvin in any one fiscal year shall not
exceed $1.3 million.
All figures above are stated in Canadian currency.
This amendment will become void if the payment is not made by October 8, 1999.
In that case the agreement dated November 1, 1997 stays in force.
If you are in agreement with the above, please signify by signing this letter
and returning it via fax to my attention.
DELVIN LTD. AGREED AND ACCEPTED BY:
Dated the 29 day of September 1999
- ------------------------- ------------------------------
Duly Authorized Signatory Duly Authorized Signatory of
Vasogen Ireland Limited
