UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-10451
NORTH AMERICAN VACCINE, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Canada 98-0121241
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12103 Indian Creek Court, Beltsville, Maryland 20705
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 419-8400
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock, no par value, outstanding as of May 1, 1997 -- 31,604,472 shares
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TABLE OF CONTENTS
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 3
Consolidated Balance Sheets.................................. 4
Consolidated Statements of Operations........................ 5
Consolidated Statement of Shareholders' Equity............... 6
Consolidated Statements of Cash Flows........................ 7
Notes to Condensed Consolidated Financial Statements......... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 20
SIGNATURES ............................................................. 21
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited, condensed consolidated financial statements of North
American Vaccine, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
This report should be read in conjunction with the Company's Annual Report on
Form 10-K filed for the year ended December 31, 1996. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial information for the interim
period reported have been made. Results of operations for the three months ended
March 31, 1997, will not necessarily be indicative of the results for the entire
fiscal year ending December 31, 1997.
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, December 31,
1997 1996
---------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 69,110 $ 70,881
Accounts receivable 445 4,166
Inventory 1,974 1,782
Prepaid expenses and other current assets 615 533
--------- ---------
Total current assets 72,144 77,362
Property, plant and equipment, net 39,040 40,629
Investment in affiliate, at market 1,234 1,281
Deferred financing costs, net 3,058 3,184
Other assets 429 506
--------- ---------
Total assets $ 115,905 $ 122,962
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,331 $ 1,912
Deferred revenue 2,470 3,000
Obligation under capital lease, current portion 1,533 1,496
Other current liabilities 6,731 4,540
--------- ---------
Total current liabilities 13,065 10,948
6.50% Convertible subordinated notes, due May 1, 2003 86,250 86,250
Obligation under capital lease, net of current portion 5,474 5,871
Deferred rent credit, net of current portion 89 114
--------- ---------
Total liabilities 104,878 103,183
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; unlimited shares authorized-
Series A, convertible; issued and outstanding 2,000,000 shares;
entitled to Can $2.50 per share in liquidation 6,538 6,538
Common stock, no par value; unlimited shares authorized; issued
31,593,357 shares at March 31, 1997 and 31,406,999 shares at
December 31, 1996 74,759 71,357
Unrealized investment holding gain 606 653
Accumulated deficit (70,876) (58,769)
--------- ---------
Total shareholders' equity 11,027 19,779
--------- ---------
Total liabilities and shareholders' equity $ 115,905 $ 122,962
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
1997 1996
--------- ---------
Revenues:
Product sales $ 545 $ 228
Marketing, research and development agreements 530 --
-------- --------
Total revenues 1,075 228
-------- --------
Operating expenses:
Production 4,307 2,932
Research and development 4,677 2,677
General and administrative 3,392 1,481
-------- --------
Total operating expenses 12,376 7,090
-------- --------
Operating loss (11,301) (6,862)
Other income (expenses):
Gain on sale of investment in affiliate -- 4,228
Interest and dividend income 893 119
Interest expense (1,699) --
-------- --------
Net loss $(12,107) $ (2,515)
======== ========
Net loss per share $ (0.38) $ (0.08)
Weighted-average number of common shares
outstanding 31,577 30,439
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Unrealized
Series A Invest- Total
Convertible ment Accum- Share-
Preferred Stock Common Stock Holding ulated holders'
Shares Amount Shares Amount Gains Deficit Equity
------ -------- ------ --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 2,000 $ 6,538 31,407 $ 71,357 $ 653 $(58,769) $ 19,779
Exercises of stock options -- -- 184 2,034 -- -- 2,034
Shares issued under
401(k) plan -- -- 2 55 -- -- 55
Stock option compensation -- -- -- 1,313 -- -- 1,313
Decrease in market value
of investment -- -- -- -- (47) -- (47)
Net loss -- -- -- -- -- (12,107) (12,107)
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1997 2,000 $ 6,538 31,593 $ 74,759 $ 606 $(70,876) $ 11,027
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1996
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,107) $ (2,515)
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of investments in affiliates -- (4,228)
Depreciation and amortization 2,683 1,168
Amortization of deferred financing costs 126 --
Contribution of common stock to 401(k) plan 55 38
Stock option compensation 1,313 --
Decrease in other assets 77 40
Decrease in deferred rent (21) (19)
Cash flows provided by other working capital items 5,523 349
-------- --------
Net cash used in operating activities (2,351) (5,167)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,094) (1,112)
Proceeds from sale of investment in affiliate -- 5,199
-------- --------
Net cash (used in) provided by investing activities (1,094) 4,087
-------- --------
Cash flows from financing activities:
Repayment of lease obligation (360) --
Proceeds from exercises of stock options 2,034 649
-------- --------
Net cash provided by financing activities 1,674 649
-------- --------
Net decrease in cash and cash equivalents (1,771) (431)
Cash and cash equivalents, beginning of period 70,881 10,443
-------- --------
Cash and cash equivalents, end of period $ 69,110 $ 10,012
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1996
-------- --------
Cash Flows Provided By Other Working Capital Items:
Decrease (increase) in :
Accounts receivable $ 3,721 $ 801
Inventory (192) (662)
Prepaid expenses and other current assets (82) 77
Increase (decrease) in :
Accounts payable 419 (356)
Other current liabilities 1,657 489
------- -------
Net cash provided by other working capital items $ 5,523 $ 349
======= =======
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 172 $ 0
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
8
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS
The Company is engaged in the research, development, production, and sale of
vaccines for the prevention of infectious diseases in children and adults. In
1996, regulatory approval of the Company's acellular pertussis vaccine
formulated as a DTaP vaccine for the prevention of diphtheria, tetanus and
pertussis (whooping cough) was granted in Sweden, and regulatory approval of a
combined DTaP-IPV (polio) vaccine was granted in Denmark. In April 1997, the
Medical Products Agency of Sweden granted regulatory approval for the Company's
monovalent acellular pertussis (aP) vaccine to vaccinate children, thereby
expanding the indication of the Company's aP vaccine. The Company has not
received approval from the U.S. Food and Drug Administration ("FDA") or any
other regulatory authority to market its DTaP vaccine or any other product in
development.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Accounting and Currency. The Company is a Canadian corporation
incorporated under the Canadian Business Corporations Act ("CBCA") on August 31,
1989. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in the United
States and are denominated in U.S. dollars, because the Company conducts the
majority of its transactions in this currency. The application of Canadian GAAP
would not result in material adjustments to the accompanying financial
statements except for the impact of the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 115, as discussed in Note 4. The effect of
foreign currency translation has been immaterial.
(b) Pervasiveness of Estimates. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from estimates.
(c) Revenue Recognition. Nonrefundable fees or milestone payments in connection
with research and development or collaborative agreements are recognized when
they are earned in accordance with the applicable performance requirements and
contract terms. Revenue from product sales is recognized when all significant
risks of ownership have been transferred, the amount of the selling price is
fixed and determinable, all significant related acts of performance have been
completed, and no other significant uncertainties exist. In most cases, these
criteria are met when the goods are shipped.
9
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(d) Net Loss Per Share. Net loss per share is computed on the weighted-average
number of common shares outstanding for the respective periods. All common stock
equivalents are excluded as they are antidilutive. Fully diluted loss per share
is not presented as it would not materially differ from primary loss per share.
In 1997, the Financial Accounting Standards Board released SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all periods
presented. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Basic earnings per share differs
from primary earnings per share pursuant to Accounting Principles Bulletin No.
15 ("APB 15"), which may include dilution related to common stock equivalents.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to APB 15. SFAS No. 128 is
effective for reporting periods ending after December 15, 1997, and when
adopted, it will require restatement of prior periods earnings per share for
those reported periods preceding December 15, 1997.
Since the effect of outstanding options, convertible notes, and preferred stock
is antidilutive, they have been excluded from the Company's computation of net
loss per share. Accordingly, management does not believe that SFAS No. 128 will
have an impact upon historical net loss per share as reported.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventory cost include materials, labor, and manufacturing
overhead. Production costs attributable to a product are expensed until
regulatory approval is obtained for such product. Inventories consist of the
following:
March 31, December 31,
1997 1996
---- ----
(in thousands)
Raw materials $1,770 $1,518
Work-in-process - 162
Finished goods 204 102
------ ------
Total $1,974 $1,782
====== ======
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4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following components:
March 31, December 31,
1997 1996
---- ----
(in thousands)
Accrued interest payable $ 2,397 $ 999
Payroll and fringe benefits 1,354 1,114
Reserve for contract loss 720 720
Accrued taxes 608 608
Accrued costs of clinical trials 485 421
Accrued consulting and professional fees 282 144
Accrued construction costs 271 192
Deferred rent credit 99 95
Other accrued liabilities 515 247
------- -------
Total other current liabilities $ 6,731 $ 4,540
======= =======
5. SHAREHOLDERS' EQUITY
In March 1997, the Company extended the expiration date for an option to
purchase 150,000 shares of common stock at an exercise price of $11.13. The
Company recognized as compensation expense in the quarter ended March 31, 1997,
the excess of the fair market value of the Company's common stock as of the date
of the option extension over the exercise price of $11.13 per share.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING PARAGRAPHS IN THIS FORM 10-Q CONTAIN CERTAIN FORWARD
LOOKING STATEMENTS, WHICH ARE WITHIN THE MEANING OF AND MADE PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THOSE REGARDING
THE PROSPECTS FOR REGULATORY APPROVAL, THE PROSPECTS FOR MARKETING AND
DISTRIBUTION OF VACCINE PRODUCTS, THE PROSPECTS FOR AND FACTORS AFFECTING FUTURE
REVENUES AND PROFITABILITY, FUTURE COMPLIANCE WITH FINANCIAL COVENANTS UNDER A
DEBT OBLIGATION, LIKELIHOOD OF ADDITIONAL FUNDING UNDER LICENSE, MARKETING,
DISTRIBUTION AND/OR DEVELOPMENT AGREEMENTS, CASH REQUIREMENTS FOR FUTURE
OPERATIONS, AND PROJECTED CAPITAL EXPENDITURES. READERS ARE CAUTIONED THAT
FORWARD LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES, AND FACTORS WHICH MAY
AFFECT THE COMPANY'S BUSINESS AND PROSPECTS, INCLUDING WITHOUT LIMITATION THOSE
DESCRIBED BELOW AS WELL AS THE RISKS ASSOCIATED WITH: OBTAINING REGULATORY
APPROVAL OF PRODUCTS BY REGULATORY AGENCIES INCLUDING THE FDA; THE PRODUCTION OF
VACCINES; THE NATURE OF COMPETITION; NEED FOR EFFECTIVE MARKETING; DEPENDENCE ON
SUPPLIERS, INCLUDING STATENS SERUMINSTITUT; AND UNCERTAINTIES RELATING TO
CLINICAL TRIALS, ALL AS DISCUSSED IN THE COMPANY'S FILINGS WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION ("SEC"), INCLUDING THE 1996 ANNUAL REPORT ON
FORM 10-K, TO WHICH THE READER'S ATTENTION IS DIRECTED.
BACKGROUND
The Company is engaged in the research, development, production, and
sale of vaccines for the prevention of infectious diseases in children and
adults.
In February 1996, the Swedish Ministry of Health granted regulatory
approval to market the Company's acellular pertussis vaccine formulated as a
combined DTaP vaccine for the prevention of diphtheria, tetanus, and pertussis
(whooping cough). This marketing authorization was the first regulatory approval
for any of the Company's products. In April 1997, the Swedish Ministry of Health
granted regulatory approval for the Company's monovalent acellular pertussis
(aP) vaccine to vaccinate children, thereby expanding the indication of the
Company's aP vaccine. In addition, the Danish National Board of Health granted
regulatory approval in September 1996 of a combined DTaP-IPV (polio) vaccine for
all primary and booster doses for infants and children in Denmark. This
combination vaccine, which combines the DTaP vaccine with an enhanced,
inactivated polio vaccine ("IPV"), was developed jointly by Statens
Seruminstitut ("SSI") and the Company.
Under supply agreements, the Company manufactures the acellular
pertussis component, and SSI manufactures the diphtheria, tetanus and IPV
components for the DTaP and DTaP-IPV vaccines. SSI is responsible for the
marketing and distribution of the DTaP and DTaP-IPV products in the
Scandinavian, Baltic and other countries comprising its territory ("SSI's
Territory"). Accordingly, the Company has been selling its acellular pertussis
toxoid to SSI for formulation into DTaP and DTaP-IPV for sale in Sweden and
Denmark, respectively. In addition, during the fourth quarter of 1996, the
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Company executed a supply and distribution agreement with Chiron Behring
("Behring") covering the Company's DTaP and DTaP-IPV vaccines for Germany and
Austria ("Behring's Territory").
In 1995 and 1996, the Company recognized development revenues pursuant
to agreements with Pasteur Merieux-Connaught, under which the Company and
Pasteur Merieux-Connaught will jointly develop the Company's meningococcus B
vaccine. Additional funding may be provided to the Company by Pasteur
Merieux-Connaught under the terms of the license and clinical development
agreements. See "Outlook," below.
In the fourth quarter of 1996, the Company and Abbott Laboratories
("Abbott") signed an agreement under which Abbott would market Certiva(TM), the
Company's DTaP vaccine, when approved by the United States Food and Drug
Administration ("FDA"). The marketing agreement also will allow Abbott to market
the Company's DTaP-HIB (Haemophilus influenza type b), DTaP-IPV and DTaP-IPV-HIB
combination vaccines, which are under development. Abbott will market
Certiva(TM) and the combination vaccines to private physicians and managed care
markets in the United States for immunization of infants and children. The
Company will market Certiva(TM) and the combination vaccines to government
purchasers, including state governments and the Centers for Disease Control and
Prevention ("CDC").
The Company and Abbott will collaborate in the clinical development of
the combination vaccines and Abbott will provide the Company with clinical
development funding. In addition, the Company will receive payments upon
achievement of prescribed milestones. The first milestone relates to FDA
approval of Certiva(TM) provided certain other conditions are satisfied. In
September 1995, the Company filed a product license application with the FDA for
approval to market Certiva(TM) and FDA approval for the vaccine is pending.
Following FDA approval, the Company will receive revenues from Abbott as it
purchases Certiva(TM) and the combination vaccine products for resale to the
private pediatric market. See "Outlook," below.
In November 1996 the Company acquired a 35,000 square foot
manufacturing facility in Beltsville, Maryland. That acquisition included the
purchase and lease of equipment and leasehold improvements and the assumption of
real estate leases. The total acquisition cost for the equipment and leasehold
improvements was approximately $24.9 million, which included a cash payment of
$17.2 million. The balance of $7.7 million is represented by an equipment lease
obligation accounted for as a capital lease, which expires in 2000. Under the
equipment lease agreement there are financial covenants that obligate the
Company to maintain certain minimum cash and investment balances, a minimum
tangible net worth and certain other financial ratios. The Company would be
required to post an irrevocable letter of credit for predetermined amounts at
such time as the Company is not in compliance with any of these financial
covenants. The Company believes that it can maintain compliance with these
financial covenants for the remainder of 1997, although there are no assurances
in this regard. This is a forward looking statement and the factors that affect
the Company's ability to maintain compliance with these financial covenants
include, among other things, the Company's ability to control costs, manage its
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cash resources, and the magnitude and timing of product sales, and payments from
license, marketing, distribution and development agreements. In addition, the
Company has assumed the real estate losses underlying the facility, which are
scheduled to expire in February 2001, but may be extended through 2011.
The Company had 224 and 168 full-time employees as of March 31, 1997
and 1996, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Revenue in the quarter ended March 31, 1997 is from product sales and
collaborative agreements. Revenue in the quarter ended March 31, 1996 is from
product sales.
Production expenses were $4.3 million in 1997 compared to $2.9 million
in 1996. The increase in these expenses in 1997 is due to increases in materials
and labor, as the Company prepares for regulatory approval of Certiva(TM) in the
United States. The increase in labor cost is attributable primarily to an
increase in the number of employees. In addition, facility costs increased in
1997 over 1996 due to the increase in production activities in 1997.
Research and development expenses increased to $4.7 million in 1997
from $2.7 million in 1996. The increase is attributable primarily to higher
depreciation and operating costs of the Company's newly acquired facility and to
a lesser extent labor and supplies, as a result of an increase in the number of
employees. These increases were offset in part by lower clinical testing and
related expenses.
General and administrative expenses were $3.4 million in 1997 as
compared to $1.5 million in 1996. The increase is primarily due to the
recognition of non-cash compensation expense in the amount of approximately $1.3
million related to the extension of the term of one expiring stock option and to
a lesser extent, higher labor costs.
Interest and dividend income increased to $893,000 in 1997 from
$119,000 in 1996. This increase is due primarily to higher cash balances as a
result of the placement of $86.25 million convertible subordinated notes in May
1996. See "Liquidity and Capital Resources," below.
In the first quarter of 1996, the Company sold 193,084 shares of its
investment in common stock of IVAX Corporation ("IVAX"), which generated
proceeds of approximately $5.2 million, and a realized gain of $4.2 million.
Interest expense in 1997 was $1.7 million due to the Company's interest
obligations under the convertible subordinated notes and an equipment lease
accounted for as a capital lease.
The factors cited above resulted in a net loss of $12.1 million or
$0.38 per share in 1997 as compared to a net loss of $2.5 million or $0.08 per
share in 1996. Without the effect of the non-cash expense related to the
extension of an expiring stock option, the net loss in 1997 would have been
$10.8 million or $0.34 per share. Without the $4.2 million gain on the sales of
investment securities, the net loss per share for 1996 would have been $0.22.
The weighted-average number of common shares outstanding was 31.6 million for
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1997 compared to 30.4 million for 1996. The increase in the number of
weighted-average shares outstanding for 1997 as compared to 1996 is attributable
primarily to the exercise of stock options and the sale of 350,000 shares of the
Company's Common Stock to Abbott.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the Company completed an offering of 6.50% convertible
subordinated notes in the principal amount of $86.25 million due May 1, 2003.
The net proceeds from this offering were approximately $82.7 million. Interest
on the notes is payable semiannually on May 1 and November 1 each year. The
notes are convertible into shares of the Company's Common Stock, at the initial
conversion price of approximately $24.86 per share. The notes also are
subordinated to present and future senior indebtedness of the Company and will
not restrict the incurrence of future senior or other indebtedness by the
Company. The notes are redeemable, in whole or in part, at the option of the
Company on or after May 1, 1999 at certain pre-established redemption prices,
plus accrued interest. Upon a change in control, the Company is required to
offer to purchase all or part of the notes then outstanding at a purchase price
equal to 100% of the principal amount thereof, plus interest. The repurchase
price is payable in cash or, at the option of the Company, in shares of the
Company's Common Stock. The Company has filed a registration statement
registering resales of the notes and the underlying shares of Common Stock,
which registration statement has been declared effective by the SEC.
The Company's cash requirement for operations was $6.4 million in the
first quarter of 1997 as compared to $9.8 million in the fourth quarter of 1996.
The Company's cash requirement for operations is the net cash used in operating
activities for the period being reported less amounts received under marketing,
research and development agreements and further adjusted by the timing of
proceeds from the sale of investments in affiliates. The reduction in cash
requirements for the first quarter is primarily due to a semi-annual interest
payment of $2.8 million on the convertible subordinated notes made during the
fourth quarter of 1996. At March 31, 1997, the Company had cash and cash
equivalents of approximately $69.1 million and investment securities in an
affiliate with a market value of $1.2 million. The investment securities
consisted of 125,000 shares of IVAX common stock. The fair market value of these
investment securities as of May 1, 1997 was approximately $910,000. These
investments are volatile and therefore subject to significant fluctuations in
value.
The Company anticipates that cash requirements for operations in the
second quarter of 1997 will be between approximately $10 and $12 million as the
Company: produces its acellular pertussis vaccine for commercial sale in Europe;
produces Certiva(TM) in anticipation of regulatory approval in the United States
and other territories; produces investigational combination vaccines and
conjugate vaccines; commences clinical trials; and makes a $2.8 million
semi-annual interest payment on the convertible subordinated notes on May 1,
1997. Thereafter, quarterly cash requirements for operations will depend upon
the level of vaccine production, costs to market Certiva(TM) upon approval, the
level of expenditures for the Company's ongoing research and development
program, and the timing of interest payments due on the convertible subordinated
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notes described above. The foregoing are forward looking statements. There are
no assurances that the Company will meet the projections for cash requirements
for operations, that any further regulatory approvals will be received as
projected, that the milestones described above will be achieved, or that, if
such milestones are obtained, they will contribute materially to the quarterly
cash requirements. Failure or significant delays in receiving additional
regulatory approvals and meeting required milestones would have a significant
adverse effect on the Company's future financial position.
Total capital expenditures for the first quarter of 1997 were $1.1
million. Total projected capital expenditures for the remainder of 1997 are
expected to be less than $5.0 million. Thereafter, capital expenditures,
exclusive of any future real estate acquisition or build-out plans, could
fluctuate based upon a number of factors including: the Company's ability to
meet demand for its licensed products from its existing facilities; the
Company's ability to produce sufficient quantities of investigational products
in its existing facilities; and unanticipated costs to replace or repair
existing equipment and systems in order to keep the manufacturing and
development facilities operational or in compliance with regulatory
requirements. The Company continues to evaluate its need to build-out, lease or
acquire additional research, development, production and other facilities to
accommodate the Company's expanding vaccine development program. The Company has
no present agreements, commitments or understandings in respect of any
additional facilities and the total capital expenditures for such a project will
vary substantially depending upon a number of factors including, among other
things, the size of such facilities, the equipment and systems requirements for
the facilities, location, zoning and other government restrictions and the
magnitude of available financing.
Cash requirements for operations and capital expenditures for the
remainder of 1997 will be financed through a combination of: cash and cash
equivalents; revenues from product sales, and fees and payments from license,
marketing, distribution and/or development agreements; the exercise of stock
options; the sale of debt and/or equity securities; mortgage financing; and
equipment leases. The Company believes that it has adequate cash resources to
meet its 1997 funding requirements although there are no assurances in this
regard. While failure or significant delays in receiving additional regulatory
approvals and meeting required milestones would have a significant adverse
effect on the Company's future operating results and future financial position,
the Company believes that in such event it could manage and reduce cash
requirements for operations, although there are no assurances in this regard.
This paragraph contains forward looking statements and the factors affecting the
ability of the Company to meet its funding requirements and manage its cash
resources include, among other things, the magnitude and timing of product
sales; the magnitude and timing of any fees and payments from license,
marketing, distribution and/or development agreements; and the magnitude of
fixed costs.
OUTLOOK
The Company recognized an operating loss of $12.1 million in the first
quarter of 1997 based on revenues of $1.1 million from product sales and under a
development agreement. The Company anticipates that the remaining 1997 quarterly
16
<PAGE>
operating results may fluctuate significantly based upon a number of factors
including, among other things: the magnitude of product sales for distribution
in Europe; the timing of FDA approval for and the commercial introduction of
Certiva(TM); the ability of the Company and its distributors to compete against
competitive products, several of which have been approved, and to effectively
market and sell products in their respective territories; the sales prices
established for products by the Company and its distributors; the efficiency of
production; the timing of the payments under license, marketing, distribution
and/or development agreements with third parties; the ability of the Company to
manufacture and deliver products in accordance with customer orders; the timing
and costs associated with clinical trials and post-licensure testing of the
Company's products; the timing and amount of funding that may be received under
any additional license, marketing, distribution and/or development agreements
with third parties; and the timing of and amount of proceeds from the sale of
additional investment securities. The foregoing are forward looking statements
and the factors affecting its outcome are described herein as well as in the
first paragraph of this Management's Discussion and Analysis of Financial
Condition and Results of Operations, and in the Company's other filings with the
SEC, including the 1996 annual report on Form 10-K, to which the reader's
attention is directed.
There are no assurances that the Company will meet the operating
results projected, that any further regulatory approvals will be received, that
any milestones will be achieved, or if achieved, that milestone payments will
contribute materially to the quarterly operating results of the Company.
Product Sales. The Company anticipates additional revenues from product
sales during the remainder of 1997 from the sale of its acellular pertussis
vaccine in Sweden for immunization of children and to SSI for its sale of the
DTaP and the DTaP-IPV vaccines in SSI's Territory. Any additional product
approvals granted to SSI could lead to increased revenues from the sale of the
Company's acellular pertussis vaccine. Additional revenues may be forthcoming
from sale of the DTaP and/or DTaP-IPV vaccines to Behring in anticipation of or
following regulatory approval for one or both of these products in the Behring
Territory. There are no assurances that further product approvals will be
obtained in these territories during 1997 or at all, or that once obtained SSI
or Behring will be effective in the marketing and distribution of the products.
The Company does not control the marketing and distribution efforts of SSI or
Behring in their respective territories and, therefore, the Company's revenues
for product sales in those territories are dependent upon the effectiveness of
these parties' sales, marketing and distribution efforts.
As described above, during 1996, the Company and Abbott signed an
agreement under which Abbott would market Certiva(TM) and certain combination
vaccines to private physicians and managed care markets in the United States for
immunization of infants and children. The Company will market these products to
government purchasers, including state governments and the CDC. FDA approval of
the Company's product license application for Certiva(TM) is pending.
The Company, therefore, anticipates revenues during 1997 from the sale
of Certiva(TM) in the United States to state governments and the CDC, and to
Abbott for resale to private physicians and the managed care market. If the
product is launched successfully in the United States by the Company and Abbott,
17
<PAGE>
revenues from operations and the prospects for profitability would significantly
increase. There can be no assurance that the FDA's approval will be obtained or
that, once obtained, the Company and/or Abbott will be effective in marketing
and distributing the product. The principal factors affecting the approval of
Certiva(TM) and its timing are believed to be the sufficiency of the clinical
trials' design, the quality of the clinical data submitted to the FDA, and the
adequacy of the manufacturing facilities and operations for the product, among
other things. The factors affecting successful commercial launch of Certiva(TM)
in the United States include, among others: successfully participating in
established purchasing programs of Federal and state governments; establishing
an identity and reputation for the Company and its products; creating an
awareness among pediatricians of the safety and efficacy of the vaccine;
distinguishing the Company's product from that of its competitors; establishing
the Company as an effective and reliable supplier of vaccines; and establishing
effective distribution channels.
The foregoing paragraphs contain only a partial description of the
factors affecting the Company's business prospects and risk factors affecting
future operations. Reference is made to the Company's filings with the SEC,
including the 1996 annual report on Form 10-K, for a more complete description
of the risks and uncertainties affecting the Company and its business.
Marketing, Research & Development Agreements. In December 1995, the
Company signed a clinical development agreement and license agreement with
Pasteur Merieux-Connaught under which the parties agreed to jointly develop its
new conjugate vaccine against meningococcus B infection for both adults and
pediatric indications. In 1996, the Company recognized revenue from Pasteur
Merieux-Connaught under this collaboration. Future fees and funding would be
made upon achievement of development, clinical and regulatory milestones. Total
remaining fees and payments to the Company upon achievement of all clinical and
regulatory milestones amount to $45 million. The first milestone is the
satisfactory completion of a pre-clinical study. In addition, the license
agreement must be ratified by the National Research Council of Canada ("NRC").
Successful completion of the milestone and ratification of the license by the
NRC would trigger a payment from Pasteur Merieux-Connaught. The time it may take
to achieve future milestones cannot be predicted accurately and there are no
assurances that any milestone will be met during 1997 or at all or that the NRC
will ratify the license agreement. In addition, Pasteur Merieux-Connaught may
terminate these agreements in its sole discretion at any time.
Under the marketing and distribution agreement with Abbott, the Company
will receive during the upcoming quarters of 1997 clinical development payments
aggregating $7 million on dates certain and milestone payments upon achievement
of prescribed clinical and regulatory events. The first milestone relates to FDA
approval of Certiva(TM) provided certain other conditions are satisfied. Total
remaining payments by Abbott to the Company under the agreement, inclusive of
payments expected during 1997, amount to $29 million. In addition, the Company
will receive revenues from Abbott as it purchases Certiva(TM) and the
combination vaccine products for resale to the private pediatric market. There
are no assurances that the milestones will be met, that the quantities of
Abbott's purchases of Certiva(TM) will be significant or as to the timing of
such purchases, or that Abbott will not exercise its right to terminate this
arrangement at any time with advance notice.
18
<PAGE>
During the upcoming quarters of 1997, the Company anticipates that
total license fees, clinical development funding and milestone payments under
its existing agreements will range from $7 million to approximately $19 million.
This is a forward looking statement and the factors that affect the timing of
the license fee and milestone payments are in large measure outside of the
control of the Company. In the first quarter of 1997, the Company recognized
$530,000 of revenue under marketing, research and development agreements. The
revenue recognized and to be recognized by the Company from clinical development
payments received from Abbott are and will be equal to the Company's
expenditures in the clinical development program for Certiva(TM) and the
combination vaccines up to a specified amount. Accordingly, such revenues are
likely to fluctuate from quarter to quarter and would have no effect on net
operating results. The factors that affect the timing of these expenditures, and
therefore, the revenues to be recognized therefrom, are subject to uncertainties
related to clinical trials and the regulatory approval process. There are no
assurances that the clinical development funding from Abbott will be sufficient
to fund all of the Company's expenditures in the clinical development program
for Certiva(TM) and the combination vaccines.
The Company is considering the advisability of executing further
distribution agreements for certain markets throughout the world. The Company
also intends to collaborate in the development of selected vaccine products and
may enter into additional collaborative development agreements similar in nature
to that which was signed with Pasteur Merieux- Connaught, as described above. In
addition, the Company is in various stages of discussions with third parties
regarding various business arrangements including licensing, joint venture,
acquisition, and other business agreements, some of which possibly may be
concluded in the near term. There are no assurances that the Company will
successfully negotiate and sign any such agreements or that, if executed, the
financial terms for any such agreement will be significant.
TAX AND OTHER MATTERS
At December 31, 1996, the Company and its subsidiaries had income tax
loss carryforwards of approximately $9.9 million to offset future Canadian
source income and approximately $55.5 million to offset future United States
taxable income subject to the alternative minimum tax rules in the United
States.
If more than a certain percentage of the Company's assets or income
becomes passive, the Company will be classified for U.S. tax purposes as a
passive foreign investment company ("PFIC"), and a U.S. taxpayer may be subject
to an additional Federal income tax on receiving certain dividends from the
Company or selling the Company's Common Stock. The Company has not been
classified as a PFIC to date, and during 1997, the Company intends to, and
believes that it can, generate sufficient other income to avoid being classified
as a PFIC. This is a forward looking statement and the factors affecting this
classification include, among other things, the timing and amount of revenue
from product sales; the timing and amount of license fees, milestone payments
and development funding under license, marketing, distribution and development
agreements; the classification of payments received by the Company as active or
passive; and the classification of the Company's assets as active or passive.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH AMERICAN VACCINE, INC.
----------------------------
(Registrant)
By: /s/Sharon Mates
--------------------
Sharon Mates, Ph.D.
President
By: /s/ Lawrence J. Hineline
-------------------------
Lawrence J. Hineline
Vice President - Finance
Date: May 7, 1997
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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<CASH> 69,110
<SECURITIES> 1,234
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6,538
<COMMON> 74,759
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