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 JUNE 30, 1998
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.
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(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 JULY 29, 1998 -- 32,208,051
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 Statements of Shareholders' Deficit............. 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................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 26
Item 6. Exhibits and Reports on Form 8-K............................. 28
SIGNATURES ............................................................. 29
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, 1997. 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
periods reported have been made. Results of operations for the three and six
months ended June 30, 1998, will not necessarily be indicative of the results
for the entire fiscal year ending December 31, 1998.
3
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) JUNE 30, DECEMBER 31,
1998 1997
---------------- ----------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,335 $ 45,502
Accounts receivable 1,178 324
Inventory 2,918 2,730
Prepaid expenses and other current assets 840 615
---------------- ----------------
Total current assets 23,271 49,171
Property, plant and equipment, net 28,440 31,428
Investment in affiliate, at market 1,156 843
Deferred financing costs, net 2,359 2,603
Cash restricted for lease obligation 5,654 -
Other assets 579 463
---------------- ----------------
TOTAL ASSETS $61,459 $84,508
================ ================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 3,048 $ 3,343
Deferred revenue 3,280 3,999
Obligation under capital lease, current portion 1,672 1,593
Other current liabilities 5,302 5,064
---------------- ----------------
Total current liabilities 13,302 13,999
6.50% Convertible subordinated notes, due May 1, 2003 83,734 83,734
Obligation under capital lease, net of current portion 3,254 4,110
Deferred rent credit, net of current portion 17 12
---------------- ----------------
Total liabilities 100,307 101,855
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
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
32,201,704 shares at June 30, 1998 and 31,936,539 shares at
December 31, 1997 80,640 78,509
Cumulative comprehensive income excluded from net loss 528 215
Accumulated deficit (125,326) (102,609)
Loan receivable from officer (1,228) -
---------------- ----------------
Total shareholders' deficit (38,848) (17,347)
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $61,459 $84,508
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Marketing, research and development agreements $ 1,148 $ 695 $ 1,719 $ 1,225
Product sales 81 368 344 913
----------------- --------------- ---------------- ---------------
Total revenues 1,229 1,063 2,063 2,138
----------------- --------------- ---------------- ---------------
OPERATING EXPENSES:
Production 4,185 4,327 9,166 8,634
Research and development 4,490 4,838 8,533 9,515
General and administrative 2,308 2,310 4,815 5,702
----------------- --------------- ---------------- ---------------
Total operating expenses 10,983 11,475 22,514 23,851
----------------- --------------- ---------------- ---------------
OPERATING LOSS (9,754) (10,412) (20,451) (21,713)
OTHER INCOME (EXPENSES):
Interest and dividend income 402 857 956 1,750
Interest expense (1,605) (1,693) (3,222) (3,392)
----------------- --------------- ---------------- ---------------
NET LOSS $ (10,957) $ (11,248) $ (22,717) $ (23,355)
================= =============== ================ ===============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.34) $ (0.36) $ (0.71) $ (0.74)
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 32,154 31,608 32,094 31,593
</TABLE>
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' DEFICIT
(IN THOUSANDS)
(UNAUDITED)
CUMULATIVE TOTAL
SERIES A COMPREHENSIVE SHARE-
CONVERTIBLE INCOME ACCUM- LOAN HOLDERS'
PREFERRED STOCK COMMON STOCK EXCLUDED FROM ULATED TO EQUITY
SHARES AMOUNT SHARES AMOUNT NET LOSS DEFICIT OFFICER (DEFICIT)
------ ------ ------ ------ -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 2,000 $ 6,538 31,937 $ 78,509 $ 215 $(102,609) $ -- $ (17,347)
Net loss -- -- -- -- -- (22,717) -- (22,717)
Increase in market
value of investment -- -- -- -- 313 -- -- 313
---------
Comprehensive income (22,404)
Exercises of stock
options -- -- 259 1,992 -- -- -- 1,992
Loan receivable from
officer -- -- -- -- -- -- (1,228) (1,228)
Shares issued under
401(k) plan -- -- 6 139 -- -- -- 139
Balance, --------- --------- --------- --------- --------- --------- --------- ---------
June 30, 1998 2,000 $ 6,538 32,202 $ 80,640 $ 528 $(125,326) $ (1,228) $ (38,848)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (22,717) $ (23,355)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,083 5,430
Amortization and reduction of deferred financing costs 244 252
Contribution of common stock to 401(k) plan 139 110
Stock option compensation - 1,313
(Increase) decrease in other assets (116) 84
Decrease in deferred rent (32) (45)
Cash flows (used in) provided by other working capital items (2,006) 5,580
------------ -------------
Net cash used in operating activities (20,405) (10,631)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,095) (1,631)
------------ -------------
Net cash used in investing activities (1,095) (1,631)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options, net 1,992 2,252
Loan to an officer related to the purchase of common stock (1,228) -
Principal payments on capital lease obligation (777) (729)
Cash restricted for capital lease obligation (5,654) -
------------ -------------
Net cash (used in) provided by financing activities (5,667) 1,523
------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (27,167) (10,739)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,502 70,881
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,335 $ 60,142
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:
(Increase) decrease in:
Accounts receivable $ (854) $ 3,972
Inventory (188) (276)
Prepaid expenses and other current assets (225) (80)
(Decrease) increase in:
Accounts payable (295) (558)
Other current liabilities (444) 2,522
----------- ----------
Net cash (used in) provided by other working capital items $ (2,006) $ 5,580
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,984 $ 3,148
----------- ----------
Use of stock to exercise stock options $ 3,429 $ -
=========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
8
<PAGE>
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
July 1998, the Company received marketing authorization from the U.S. Food and
Drug Administration ("FDA") to market its DTaP vaccine (Certiva[TRADEMARK]) in
the United States for the prevention of diphtheria, tetanus, and pertussis
(whooping cough). Previously, in 1996, regulatory approval for a European
formulation of Certiva[TRADEMARK] was granted in Sweden, and regulatory approval
of a combined DTaP-IPV (polio) vaccine was granted in Denmark. In April 1997,
regulatory approval for the Company's monovalent acellular pertussis (aP)
vaccine to vaccinate children was also granted in Sweden, thereby expanding the
market for the Company's aP vaccine. In June 1998, the Company was advised that,
under the European mutual recognition procedure, the regulatory authorities in
Germany, Austria, Sweden and Finland agreed to recognize the marketing
authorization granted by Denmark for the DTaP-IPV vaccine. The mutual
recognition procedure now requires that each of these regulatory authorities,
upon receipt of certain prescribed information, issue the national marketing
authorization for the product. The Company has appointed Chiron Behring GmbH &
Co. ("Chiron") to market and distribute the DTaP-IPV product in Germany and
Austria. Statens Serum Institut, Copenhagen, Denmark, holds the product
registrations and will market and distribute the product in the Scandinavian
countries.
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. 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.
9
<PAGE>
(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.
(d) DEPRECIATION AND AMORTIZATION. Prior to 1998, depreciation of property,
plant and equipment, with the exception of leasehold improvements and an owned
facility, was provided using an accelerated method over the estimated useful
lives of the assets. For property, plant and equipment purchased after 1997,
depreciation will be provided using the straight-line method over the estimated
useful lives.
(e) NET LOSS PER SHARE. Net loss per share is computed in accordance with
Financial Accounting Standards Board release 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. 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. SFAS No. 128 was
implemented for the year ended December 31, 1997. Options, warrants, and
convertible securities that were outstanding at the end of all periods presented
were not included in the computation of diluted loss per share as their effect
would have been anti-dilutive. As a result, the basic and diluted loss per share
amounts are identical for all periods presented.
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 for both 1998 and 1997. Accordingly, SFAS No. 128 did not have an
impact upon historical net loss per share as reported.
(f) In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company presents its comprehensive income
in the statement of shareholders' equity.
(g) In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
Company is evaluating the impact of SFAS 131, which is required for its year end
1998 reporting.
10
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2. PROPERTY, PLANT AND EQUIPMENT
In March 1998, the Company leased an approximately 75,500 square foot facility
to be used for research, development, general and administrative functions and
for future expansion of the Company's operations. The lease is for an initial
term of ten years, with two five-year renewal options. The initial base annual
rent under the lease is approximately $981,000 with minimum annual escalations.
At the end of the fifth year of the initial term, the Company has the right to
terminate the lease for a specified fee. In addition, the Company has an option
to purchase the facility during specified periods of the lease term. The
landlord has provided the Company a tenant improvement allowance of
approximately $1.4 million, and will provide an additional $1.8 million to the
Company, if needed, under a line of credit to fund improvement costs in excess
of the tenant improvement allowance. Monthly payments under this line of credit
would consist of interest only accruing at the simple annual rate of 12.75%, and
the entire unpaid principal balance would mature in September 2000, unless
extended by the Company up to March 2002. The line of credit also would be
secured by all leasehold improvements and related facility enhancements
purchased with funds provided by the landlord. No funds have been drawn down
under this line of credit.
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:
June 30, December 31,
1998 1997
---- ----
(in thousands)
Raw materials $ 2,692 $ 2,584
Finished goods 226 146
-------- -------
Total $ 2,918 $ 2,730
======== =======
4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following components:
June 30, December 31,
1998 1997
---- ----
(in thousands)
Payroll and fringe benefits $ 1,822 $ 1,488
Accrued interest 952 959
Reserve for contract loss 720 720
Accrued taxes 779 642
Accrued costs of clinical trials 210 269
Accrued consulting and professional fees 318 381
Other accrued liabilities 501 605
-------- --------
Total other current liabilities $ 5,302 $ 5,064
======= =======
11
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5. RESTRICTED CASH AND OBLIGATIONS UNDER CAPITAL LEASE
In connection with an operating lease for a 35,000 square foot development and
production facility, the Company entered into an agreement that included the
purchase and lease of equipment and leasehold improvements. As part of the
operating lease, the Company assumed the underlying real estate leases which are
scheduled to expire in February 2001, but may be extended through 2011. Under
the terms of the equipment lease, there are certain financial covenants that
obligate the Company to maintain certain cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated notes), and certain other financial ratios. The equipment lease
agreement permits the Company, at its option, to suspend the application of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company provided certain conditions are satisfied. In April 1998, as
permitted by the equipment lease agreement, the Company voluntarily posted a
letter of credit in the amount of $5.9 million, thereby suspending the
application of all financial covenants. The letter of credit will decrease on a
monthly basis as the payments on the lease obligation are made and is secured by
a restricted cash deposit of an equal amount. The balance of the letter of
credit and the corresponding restricted cash is $5.7 million at June 30, 1998.
The letter of credit will expire by its terms on November 1, 2000.
6. STOCK OPTION COMPENSATION
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 $1.3 million in the quarter ended
March 31, 1997, which was 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.
7. RELATED PARTY TRANSACTION
In April 1998, the Company extended a loan to its president related to the
exercise of expiring stock options. The loan is comprised of $1.0 million for
the exercise of the options and $217,000 for payment of withholding taxes. The
loan has been made on a full recourse basis, is for a six month period, is
collateralized by approximately 94,000 shares of common stock of the Company,
which at the time of the loan had a fair market value of 125% of the principal
amount of the loan. The loan accrues interest at a fair market rate.
12
<PAGE>
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, LIKELIHOOD OF ADDITIONAL FUNDING UNDER LICENSE,
MARKETING, DISTRIBUTION AND/OR DEVELOPMENT AGREEMENTS OR FROM FURTHER
FINANCINGS, CASH REQUIREMENTS FOR FUTURE OPERATIONS, AND PROJECTED CAPITAL
EXPENDITURES. READERS ARE CAUTIONED THAT FORWARD LOOKING STATEMENTS INVOLVE
RISKS, UNCERTAINTIES, AND FACTORS THAT 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 U.S. FOOD AND DRUG ADMINISTRATION ("FDA"); THE PRODUCTION
OF VACCINES; THE NATURE OF COMPETITION; NEED FOR EFFECTIVE MARKETING; DEPENDENCE
ON SUPPLIERS, INCLUDING STATENS SERUM INSTITUT ("SSI"); 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 1997 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 July 1998, the Company received FDA approval to manufacture and
market its DTaP vaccine (Certiva[TRADEMARK]) in the United States. Under the FDA
approval, Certiva[TRADEMARK] is indicated for active immunization against
diphtheria, tetanus and pertussis (whooping cough) in infants and children six
weeks to seven years of age. The Company produces the monocomponent acellular
pertussis toxoid and formulates the final product with diphtheria and tetanus
toxoids manufactured and supplied by SSI.
Under a marketing agreement between the Company and Abbott Laboratories
("Abbott"), Abbott will market Certiva[TRADEMARK] to private physicians and
managed care markets in the United States for immunization of infants and
children. The Company will market Certiva[TRADEMARK] and the combination
vaccines to government purchasers, including state governments and the Centers
for Disease Control and Prevention ("CDC"). The marketing agreement also will
allow Abbott to market the Company's DTaP-HIB (incorporating one of its
Haemophilus influenza type b vaccines), DTaP-IPV and DTaP-IPV-HIB combination
vaccines, which are under development.
The Company and Abbott are collaborating in the clinical development of
the combination vaccines and Abbott is providing the Company with clinical
development funding. In addition, the Company will receive payments upon
achievement of prescribed milestones. Under the agreement with Abbott, the
Company will receive revenues from Abbott as it purchases Certiva[TRADEMARK] and
the combination vaccine products for resale to the private pediatric market. See
"Outlook," below.
13
<PAGE>
FDA approval of Certiva[TRADEMARK] follows regulatory approval in
various European countries of vaccines using the Company's acellular pertussis
vaccine. The Swedish Ministry of Health granted regulatory approval in February
1996 to market a European formulation of Certiva[TRADEMARK], the Company's
acellular pertussis vaccine formulated with diphtheria and tetanus toxoids 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 market for the
Company's aP vaccine. In addition, the Danish National Board of Health granted
regulatory approval in September 1996 of the DTaP vaccine combined with an
enhanced inactivated polio vaccine ("DTaP-IPV") for all primary and booster
doses for infants and children in Denmark. In June 1998, the Company was advised
that under the European mutual recognition procedure, the regulatory authorities
in Germany, Austria, Sweden and Finland agreed to recognize the marketing
authorization granted to SSI by Denmark for the DTaP-IPV vaccine. The mutual
recognition procedure now requires that these regulatory authorities issue
national marketing authorizations upon receipt of certain information, which is
presently being prepared for submission. The Company has appointed Chiron
Behring GmbH & Co. ("Chiron") to market and distribute the DTaP-IPV product in
Germany and Austria. SSI holds the product registrations and will market and
distribute the product in the Scandinavian countries.
Under supply agreements, the Company manufactures the acellular
pertussis component, and SSI manufactures the diphtheria, tetanus and
inactivated polio vaccine ("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 its territory.
In 1995, 1996 and 1997, the Company recognized development revenues
pursuant to agreements with Pasteur Merieux Serums et Vaccins, a wholly-owned
subsidiary of Rhone-Poulenc, which operates in North America through its
subsidiary Connaught Laboratories ("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.
14
<PAGE>
In May 1996, the Company completed an offering of 6.50% convertible
subordinated notes in the principal amount of $86.25 million due in full on 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 an
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. In December of 1997, approximately $2.5 million of the
principal amount of the notes were converted into 101,207 shares of the
Company's common stock. As of June 30, 1998, the principal amount of the
outstanding notes was $83.7 million.
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 (defined to include amounts under the outstanding convertible
subordinated notes) and certain other financial ratios. The equipment lease
agreement permits the Company, at its option, to suspend the application of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company provided certain conditions are satisfied. In April 1998, as
permitted by the equipment lease agreement, the Company voluntarily posted a
letter of credit in the amount of $5.9 million, thereby suspending the
application of all financial covenants. The letter of credit will decrease on a
monthly basis as the payments on the lease obligation are made and is secured by
a restricted cash deposit of an equal amount. The balance of the letter of
credit and the corresponding restricted cash is $5.7 million at June 30, 1998.
The letter of credit will expire by its terms on November 1, 2000. In addition,
the Company has assumed the real estate leases underlying the facility, which
are scheduled to expire in February 2001, but may be extended through 2011.
The Company had 296 and 245 employees as of June 30, 1998 and 1997,
respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
In 1998, the Company recognized $81,000 in revenue from product sales
to SSI and $1.1 million under collaborative agreements. Revenue from
collaboration agreements consists primarily of milestone payments under a supply
and distribution agreement with Chiron and to a lesser extent development
funding under the Company's agreement with Abbott.
15
<PAGE>
Production expenses were $4.2 million in 1998 compared to $4.3 million
in 1997. The decrease in these expenses in 1998 is primarily attributable to
decreases in materials and lower depreciation expense related to the use of an
accelerated depreciation method in prior years. The decrease in material and
depreciation costs were partially offset by higher labor expenses, attributable
primarily to an increase in the number of employees. Production costs
attributable to a product are expensed until regulatory approval is obtained for
such product.
Research and development expenses were $4.5 million in 1998 compared to
$4.8 million in 1997. The decrease is attributable primarily to lower
depreciation expense related to the use of an accelerated depreciation method in
prior years and to reduced expenses for patent filings. These decreases were
offset in part by higher building costs associated with the new 75,500 square
foot leased facility. See "Liquidity and Capital Resources," below.
General and administrative expenses were $2.3 million in 1998 and 1997.
There were no significant cost category changes from the previous period.
Interest and dividend income decreased to $402,000 in 1998 from
$857,000 in 1997. This reduction is due primarily to a change in the average
cash balance.
Interest expense decreased to $1.6 million in 1998 from $1.7 million in
1997. The decrease is due primarily to principal payments made on the equipment
lease, as well as to the conversion of $2.5 million principal amount of
convertible notes into common stock of the Company in December 1997.
The factors cited above resulted in a net loss of $11.0 million or
$0.34 per share in 1998 as compared to a net loss of $11.2 million or $0.36 per
share in 1997. The weighted-average number of common shares outstanding was 32.2
million for 1998 compared to 31.6 million for 1997. The increase in the number
of weighted-average shares outstanding for 1998 as compared to 1997 is
attributable primarily to the exercise of stock options and the conversion of
$2.5 million principal amount of convertible notes into 101,207 shares of common
stock in December 1997.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
In 1998, the Company recognized $344,000 in revenue from product sales
to SSI and $1.7 million under collaborative agreements. Revenue from
collaboration agreements consists primarily of milestone payments under a supply
and distribution agreement with Chiron and to a lesser extent development
funding under the Company's agreement with Abbott.
Production expenses were $9.2 million in 1998 compared to $8.6 million
in 1997. The increase in these expenses in 1998 is primarily attributable to an
increase in the number of production employees as the Company prepared for
regulatory approval of Certiva[TRADEMARK]. The increases were offset in part by
lower depreciation expense related to the use of an accelerated depreciation
16
<PAGE>
method in prior years. Production costs attributable to a product are expensed
until regulatory approval is obtained for such product.
Research and development expenses were $8.5 million in 1998 compared to
$9.5 million in 1997. The decrease is attributable primarily to lower
depreciation expense related to the use of an accelerated depreciation method in
prior years, reduced expenses for clinical trials, and reimbursements for
expenses under a collaborative agreement. These decreases were offset in part by
higher labor expenses as a result of an increase in the number of employees.
General and administrative expenses were $4.8 million in 1998 as
compared to $5.7 million in 1997. The decrease is primarily due to the
recognition of a non-cash compensation expense of approximately $1.3 million in
1997, offset in part by higher promotional expense and higher labor expenses as
a result of an increase in the number of employees.
Interest and dividend income decreased to $956,000 in 1998 from $1.8
million in 1997. This reduction is due primarily to a change in the average cash
balance.
Interest expense decreased to $3.2 million in 1998 from $3.4 million in
1997. The decrease is due primarily to principal payments made on the equipment
lease, as well as to the conversion of $2.5 million principal amount of
convertible notes into common stock of the Company in December 1997.
The factors cited above resulted in a net loss of $22.7 million or
$0.71 per share in 1998 as compared to a net loss of $23.4 million or $0.74 per
share in 1997. Without the effect of the $1.3 million non-cash compensation
expense, the loss in 1997 would have been $22.0 million or $0.70 per share. The
weighted-average number of common shares outstanding was 32.1 million for 1998
compared to 31.6 million for 1997. The increase in the number of
weighted-average shares outstanding for 1998 as compared to 1997 is attributable
primarily to the exercise of stock options and the conversion of $2.5 million
principal amount of convertible notes into 101,207 shares of common stock in
December 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirement for operations was $11.8 million in the
second quarter of 1998 as compared to $8.6 million in the first quarter of 1998.
The Company's cash requirement for operations is the net cash used in operating
activities for the period being reported less amounts received under license,
marketing, distribution and/or development agreements and further adjusted by
the timing of proceeds from the sale of an investment in an affiliate. The
increase in cash requirements from the first quarter is attributable primarily
to a semi-annual interest payment of $2.7 million on the convertible
subordinated notes made during the second quarter of 1998. At June 30, 1998, the
Company had cash and cash equivalents of approximately $24.0 million, of which
$5.7 million is pledged as collateral under the letter of credit agreement
described above, and investment securities in an affiliate with a market value
of $1.2 million. The
17
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investment consisted of 125,000 shares of IVAX Corporation ("IVAX") common
stock. The fair market value of such stock as of July 29, 1998 was approximately
$1.1 million. This investment is volatile and therefore subject to significant
fluctuations in value.
The Company anticipates that cash requirements for operations in the
third quarter of 1998 could be between approximately $9.0 and $10.0 million as
the Company: produces its acellular pertussis vaccine for sale in Europe;
produces Certiva[TRADEMARK] for sales in the United States; produces
investigational combination vaccines and conjugate vaccines; and conducts
clinical trials. Quarterly cash requirements for operations beyond this period
will depend principally upon the level and efficiency of vaccine production,
level of sales of Certiva[TRADEMARK] in the U.S., level of product sales in
Europe as additional approvals are obtained, costs to market Certiva[TRADEMARK],
the level of expenditures for the Company's ongoing research and development
program, and the timing of interest payments due on the convertible subordinated
notes described above. If the Company does not generate sales of
Certiva[TRADEMARK] on a timely basis, the Company will need to address its cash
requirements for operations through significant reductions in operating levels
and through the sale of debt or equity securities, among other means as more
fully described below. Although the Company presently has no firm commitments or
agreements with respect to any financing alternative, such agreements
ultimately may be reached, possibly in the near term. There are no assurances
that the Company will be successful, under these circumstances, in significantly
reducing operating levels or in placing debt or equity securities on favorable
terms or in an amount required to meet its future cash requirements for
operations. The foregoing are forward looking statements. There are no
assurances that the Company will not exceed its projected cash requirements for
operations, that the Company will generate sufficient sales, that any further
regulatory approvals will be received, that the milestones under existing
marketing and research and development agreements 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 milestones would have a significant adverse
effect on the Company's future financial position.
Total capital expenditures for the first six months of 1998 were $1.1
million. The Company is in the planning stages of expanding its manufacturing
capacity for its vaccine products for both clinical trials and for commercial
sale. Total projected capital expenditures for 1998 for facilities'
modifications, equipment, systems and other capital additions could range
between $2 million to $6 million, depending upon the ultimate extent of the
expansions, which has not yet been determined. The foregoing is a forward
looking statement. The amount of and timing for capital expenditures could
fluctuate based upon a number of factors including, without limitation: the
magnitude of the changes in the facilities required to meet demand for the
Company's acellular pertussis products; the equipment and leasehold improvements
required in order to expand the Company's production capacity for
investigational products; the anticipated timing of further regulatory approvals
for existing products; the anticipated timing of regulatory approval for future
products; 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.
18
<PAGE>
In March 1998, the Company leased an approximately 75,500 square foot
facility to be used for research, development, general and administrative
functions and for future expansion of the Company's operations. This facility is
replacing the Company's existing research and development facility, which the
Company vacated in April 1998, and the Company intends to move its general and
administrative functions to the new facility during 1998. The lease is for an
initial term of ten years, with two five-year renewal options. The initial base
annual rent under the lease is approximately $981,000 with minimum annual
escalations. At the end of the fifth year of the initial term, the Company would
have the right to terminate the lease for a specified fee. In addition, the
Company has an option to purchase the facility during specified periods of the
lease term. The landlord has provided the Company with a tenant improvement
allowance of approximately $1.4 million, and will provide an additional $1.8
million to the Company, if needed, under a line of credit to fund improvement
costs in excess of the tenant improvement allowance. Monthly payments under this
line of credit would consist of interest only accruing at the simple annual rate
of 12.75%, and the entire unpaid principal balance would mature in September
2000, unless extended by the Company up to March 2002. The amounts drawn from
this line of credit also would be secured by all leasehold improvements and
related facility enhancements purchased with funds provided by the landlord. The
lease payments and operating costs for this facility are included in, and not in
addition to, the anticipated cash requirements for operations described above.
The Company currently anticipates that total capital expenditures required to
modify the facility to accommodate the Company's operations would cost
approximately $1.4 million and be funded primarily by the allowance described
above. This is a forward looking statement. The additional capital expenditures
for this or other facilities may 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 1998 and
into 1999 are expected to be financed through a combination of: the sale of debt
and/or equity securities, including the possible sale of securities to related
parties, affiliates, existing shareholders or other third parties; cash and cash
equivalents; fees and payments from existing and/or new license, marketing,
distribution and/or development agreements; the exercise of stock options;
mortgage financing; lines of credit; and equipment leases. Although the Company
believes that it has adequate resources to meet its 1998 funding requirements,
there can be no assurances in this regard. The Company has been actively
considering and evaluating the advisability and feasibility of a variety of
financing alternatives, including the sale of debt and/or equity securities.
Although the Company presently has no firm commitments or agreements with
respect to any financing alternative, the Company believes that one or more such
agreements ultimately may be reached with one or more of its related parties,
affiliates, existing shareholders or other third parties, possibly in the near
term, although there can be no assurances in this regard. Failure or significant
delays in receiving substantial payments under existing and/or new license,
marketing, distribution and/or development agreements or in successfully
completing a debt or equity financing would have a significant adverse effect on
the Company's future financial position. The Company believes that in such event
it would reduce cash requirements for operations through significant reductions
in operating levels, although there are no assurances
19
<PAGE>
that the Company would be successful in reducing operating levels or that, if
operating levels are reduced, it would be able to maintain operations for any
extended period of time. 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 and
without limitation: the ability of the Company successfully to complete the sale
of its debt or equity securities; the magnitude of product sales for
distribution in Europe; the timing for the commercial introduction of
Certiva[TRADEMARK]; the magnitude and timing of product sales in the United
States; the ability of the Company to compete against competitive products both
directly and through its distributors; the efficiency of the Company's
production operations; the sales price for products established by the Company
and its distributors; the magnitude and timing of any fees and payments from
existing and new license, marketing, distribution and/or development agreements;
the magnitude of fixed costs; and the capital expenditures required to operate
facilities.
OUTLOOK
The Company recognized a net loss of $11.0 million in the second
quarter of 1998 and expects to incur a net loss of between $9 and $11 million in
the third quarter of 1998. The Company anticipates that the next several
quarters' 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 for the commercial introduction of
Certiva[TRADEMARK]; the ability of the Company and its distributors to compete
against competitive products 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 the Company's production
operations; the timing of the payments under existing 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 the Company's future
operating results and financial condition are described herein as well as
elsewhere in this Management's Discussion and Analysis of Financial Condition
and Results of Operations including the first paragraph hereof, and in the
Company's other filings with the SEC, including the 1997 annual report on Form
10-K, to which the reader's attention is directed.
Prior to regulatory approval, costs to produce Certiva[TRADEMARK] for
sale in the United States were expensed as incurred. Beginning in the third
quarter, production expenses for Certiva[TRADEMARK] will be capitalized in
accordance with generally accepted accounting principles and recognized as
expense when the product is sold. Accordingly, the quarterly operating results
may be affected by the quantity of product produced for sale since the
production expenses have been mainly fixed and consist primarily of costs to
operate the production facilities and to maintain a ready work force. To date,
the Company has limited experience and success in manufacturing commercial
quantities of its vaccine products and in operating its manufacturing
facilities. From time to time, the Company experiences disruptions and
production failures and there are no assurances that the steps taken by the
Company to address such failures will be effective or that such failures will
20
<PAGE>
not continue in the future. Such disruptions or failures would have a material
adverse effect on the Company's future operating results and could affect the
Company's ability to obtain any further regulatory approvals for its products or
the timing of such approvals. No assurances can be given that the Company will
be successful in establishing and maintaining consistent and continuous
commercial production of its vaccines in sufficient quantity and quality or that
it will be capable of producing a competitively priced product for commercial
sale. The Company's manufacturing operations for Certiva[TRADEMARK] are located
principally in one facility. Any condition or event that adversely affects the
condition or operation of such facility would have a material adverse affect on
the Company's financial condition and future results of operations. In addition,
given its size and configuration, such facility has limited production capacity.
Accordingly, there are no assurances that the Company will be able to produce
sufficient quantities of vaccine to meet market demand or achieve profitability.
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, that product sales for Europe will be material,
that Certiva[TRADEMARK] will be effectively or successfully marketed,
distributed or sold in the United States or that such milestone payments and
sales will affect materially the future operating results of the Company.
PRODUCT SALES. As described above, during July 1998, the Company
received FDA approval to manufacture and market Certiva[TRADEMARK] in the United
States. Pursuant to a marketing and distribution agreement between the Company
and Abbott, Abbott will market Certiva[TRADEMARK] 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. The Company anticipates that
Certiva[TRADEMARK] will be launched during the fourth quarter of 1998, or sooner
if possible, and if the product is launched successfully in the United States by
the Company and Abbott, revenues from operations and the prospects for
profitability would increase. The foregoing are forward looking statements, and
there are no assurances that Certiva[TRADEMARK] will be launched in the
projected timeframe, that the Company and/or Abbott will be effective in
marketing and distributing Certiva[TRADEMARK], or that the Company will achieve
profitability based solely on revenues from sales in the United States and
Europe of its presently approved products, or from sales of any future vaccines
under development. The factors affecting successful commercialization of
Certiva[TRADEMARK] 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 those of its
competitors; establishing the Company as an effective and reliable supplier of
vaccines; establishing efficient and consistent production of sufficient
quantities of vaccine and establishing effective distribution channels.
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<PAGE>
The Company anticipates additional revenues from product sales during
1998 to one or more European distributors for sale and distribution in select
European countries. Any additional product approvals in Europe could lead to
increased revenues from the sale of the Company's acellular pertussis vaccine.
There are no assurances that further product approvals will be obtained in
Europe during 1998 or at all, or that once obtained the products will be
launched in a timely manner or at all, or that if launched, that the marketing
and distribution efforts will be effective. The Company does not control the
marketing and distribution efforts for its products in Europe and, therefore,
the Company's revenues for product sales in those territories are dependent upon
the timing, implementation, and effectiveness of the sales, marketing and
distribution efforts of others. Additionally, although the FDA Export Reform and
Enhancement Act permits a company to export vaccines manufactured in the United
States with little or no prior FDA review and approval, the FDA retains the
authority and ability to delay, suspend or terminate a manufacturer's ability to
commence or continue such efforts. This authority may be exercised if the FDA
finds the product fails to meet prescribed standards relating to manufacturing,
labeling, and promotional activities, among others. There are no assurances that
the FDA will not, at any time or from time to time, seek to delay, defer or
suspend the Company's export activities for failure to meet any of the
prescribed standards of the statute. Any such action could have a material
adverse affect on the future results of operations.
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 risk factors and other information
contained in this report, as well as the Company's other filings with the SEC,
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 the
Company's new conjugate vaccine against Group B meningococcal infection for both
adults and pediatric indications. Through June 30, 1998, the Company recognized
$13 million of revenue from Pasteur Merieux-Connaught under these agreements.
Future fees and funding would be received 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 $39
million. The time it may take to achieve future milestones cannot be predicted
accurately, and there are no assurances that any additional milestones will be
met. 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 clinical development payments and milestone payments upon
achievement of prescribed clinical and regulatory events. At June 30, 1998,
total remaining payments by Abbott to the Company under the agreement amounted
to $26 million. In addition, the Company will receive revenues from Abbott as it
purchases Certiva[TRADEMARK] and the combination vaccine products for resale to
22
<PAGE>
the private pediatric market in the United States. There are no assurances that
the milestones will be met, that the quantities of Abbott's purchases of
Certiva[TRADEMARK] 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.
In 1998, the Company anticipates that total receipts of license fees,
clinical development funding and milestone payments under its existing
marketing, research and development agreements could be approximately $3
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 Company's control. The revenue 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[TRADEMARK] 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 the planning, commencement and completion of 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[TRADEMARK] and the
combination vaccines.
The Company is considering 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. 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, 1997, the Company and its subsidiaries had income tax
loss carry forwards of approximately $22.3 million to offset future Canadian
source income and approximately $77.1 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 it intends to, and believes that it can,
generate sufficient other income to avoid being classified as a PFIC. This is a
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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.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997. The Company has implemented SFAS No. 128 for
1997 and 1998. SFAS No. 128 requires dual presentation of basic and diluted
earnings per share. Basic loss per share includes no dilution and is computed by
dividing net loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted loss per share
includes the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Options, warrants and convertible securities that were outstanding at June 30,
1997 and 1998, were not included in the computation of diluted loss per share as
their effect would be anti-dilutive. As a result, the basic and diluted loss per
share amounts are identical.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company has implemented SFAS 130 beginning with the first
quarter 1998 financial statements. The implementation of this standard did not
result in a material impact to the Company's financial statements. The Company
is currently evaluating the impact of SFAS 131, which is required to be
implemented in the Company's year end 1998 financial statements.
IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Management has
initiated a company-wide program to prepare the Company's computer systems and
programs for the year 2000. Based on a recent internal interim assessment, the
Company believes that the principal management information system software that
was recently purchased and is currently being implemented is designed to be Year
2000 compliant. However, there can be no assurances in this regard. The Company
intends to test the system for Year 2000 compliance. The Company also uses
various "off the shelf" software applications for the storage and analysis of
various types of data and systems. Management is dependent on this software for
day-to-day operations. The Company is evaluating all such applications and
systems in order to determine whether or not modifications or replacement will
be necessary to achieve Year 2000 qualification. This is an ongoing process and
the Company is unable at this time to assess the impact, if any, this assessment
might ultimately have on the Company's systems and operations or its future
financial position or results of operations.
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<PAGE>
The Company has not communicated with all of its significant suppliers
to determine the extent to which the Company is vulnerable to failures by such
third parties to remediate their own Year 2000 issues. The Company has not been
advised by its suppliers that costs to obtain Year 2000 compliance will be
passed on to the Company; however, there can be no assurances that such costs
will not be passed through to the Company either directly or indirectly or, if
passed through to the Company, the magnitude of such charges. The systems of
other companies on which the Company's systems rely may not be timely converted.
Accordingly, there are no assurances that the failure by such other companies'
systems to achieve Year 2000 qualification, or qualify in a manner that is
compatible to Company systems, would not have a material, adverse effect on the
Company.
The Company has determined that it has no exposure to contingencies
related to the Year 2000 Issue for product it has sold. Based on the preliminary
internal assessment, the Company has not identified any material costs or
expenditures specifically related to software modifications for Year 2000
compatibility. This internal assessment is a continuing process, consequently
there can be no assurances that the Company will not be required to expend
significant amounts on achieving Year 2000 qualification or that such
expenditures will not have a material adverse affect on future results from
operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Shareholders was held on May 20, 1998. The
matters voted on and approved by the shareholders at the meeting, together with
a tabulation of the respective votes, are as follows:
1. ELECTION OF DIRECTORS. The following individuals were elected, by the
following votes to serve as the directors of the Company until the
Company's next annual meeting of shareholders, or until their respective
successors are duly elected and qualified or until their prior resignation
or removal:
NAME FOR WITHHELD
---- --- --------
Neil Flanzraich 28,722,545 181,354
Francesco Bellini 28,614,789 289,110
Phillip Frost 28,722,789 181,110
Alain Cousineau 28,722,789 181,110
Jonathan Deitcher 28,722,789 181,110
Denis Dionne 28,614,789 289,110
Gervais Dionne 28,722,789 181,110
Lyle Kasprick 28,722,789 181,110
Francois Legault 28,722,789 181,110
Sharon Mates 28,722,789 181,110
Richard Pfenniger 28,722,789 181,110
There were no broker non-votes or abstentions in the election of
directors. These individuals constitute the Company's entire Board
of Directors.
2. APPROVAL OF THE COMPANY'S 1997 SHARE OPTION PLAN. The Company's 1997 Share
Option Plan was duly approved by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
24,337,921 209,878 29,720 4,326,380
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3. APPOINTMENT OF ACCOUNTANTS. Arthur Andersen LLP was duly appointed as
independent public accountants of the Company for the year ending December
31, 1998, by the following vote:
FOR AGAINST ABSTAIN
--- ------- -------
Appointment of Arthur Andersen LLP 28,837,377 50,262 16,260
as independent public accountants
of the Company
There were no broker non-votes in the appointment of the independent public
accountants.
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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.
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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: August 14, 1998
29
<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 JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,335
<SECURITIES> 1,156
<RECEIVABLES> 1,178
<ALLOWANCES> 0
<INVENTORY> 2,918
<CURRENT-ASSETS> 23,271
<PP&E> 59,379
<DEPRECIATION> 30,939
<TOTAL-ASSETS> 61,459
<CURRENT-LIABILITIES> 13,302
<BONDS> 83,734
0
6,538
<COMMON> 80,640
<OTHER-SE> (126,026)
<TOTAL-LIABILITY-AND-EQUITY> 61,459
<SALES> 81
<TOTAL-REVENUES> 1,229
<CGS> 0
<TOTAL-COSTS> 10,983
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,605
<INCOME-PRETAX> (10,957)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,957)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,957)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
