UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
------ ----------
(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
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, No Par Value American Stock Exchange
-------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act:
None
----
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days.
Specified date -- March 15, 1998; Aggregate market value -- $267,103,568
-----------
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 March 15, 1998 -- 32,050,452
----------
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
certain sections of the registrant's Proxy Statement to be furnished to
shareholders pursuant to the Securities Exchange Act of 1934, as amended, in
connection with the 1998 Annual Meeting of Shareholders of the registrant (the
"1998 Proxy Statement").
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
PART I
1 Business................................................................. 3
2 Properties............................................................... 29
3 Legal Proceedings........................................................ 30
4 Submission of Matters to a Vote of Security Holders...................... 30
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters.... 31
6 Selected Financial Data.................................................. 32
7 Management's Discussion and Analysis of Financial Condition and Results
of Operation............................................................. 34
7A Quantitative and Qualitative Disclosures About Market Risk .............. 45
8 Financial Statements and Supplementary Data.............................. 45
9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 68
PART III
10 Directors and Executive Officers of the Registrant....................... 68
11 Executive Compensation................................................... 68
12 Security Ownership of Certain Beneficial Owners and Management........... 68
13 Certain Relationships and Related Transactions........................... 68
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 69
Signatures............................................................... 70
- 2 -
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
North American Vaccine, Inc. (the "Company") is engaged in the
research, development, production and sale of vaccines for the prevention of
human infectious diseases. The Company's first product is a patented,
monocomponent acellular pertussis ("aP") vaccine for the prevention of whooping
cough. The aP vaccine has been combined with diphtheria and tetanus toxoids as a
combined diphtheria-tetanus-acellular pertussis ("DTaP") vaccine to be marketed
in the United States under the trade name Certiva(TM). Regulatory approvals were
granted in 1996 in Sweden for a European formulation of Certiva(TM) and in
Denmark for a DTaP-IPV vaccine, which combines the European formulation of
Certiva(TM) with an enhanced, inactivated polio vaccine ("IPV"). In addition,
regulatory approval was granted in Sweden in April 1997 for the Company's aP
vaccine for children and young adolescents at risk for pertussis, thereby
expanding the indications and usage of the aP vaccine. The Company has numerous
other vaccines in varying stages of development, including combination vaccines
using Certiva(TM) as an "anchor," as well as several conjugate vaccines for the
prevention of various bacterial diseases in children and adults.
Vaccination against infectious disease is a primary component of
pediatric, and an increasingly important element of adult health-care programs
throughout the world. For example, in the United States, ten pediatric vaccines,
including vaccines for the prevention of diphtheria, tetanus, pertussis and
polio, are generally required by state immunization programs. The Company
estimates that over 25 million doses of combination diphtheria, tetanus and
pertussis vaccines were sold in the United States during 1996. The Company
believes that a market of at least comparable size exists outside the United
States. In the adult market, vaccinations, particularly of older persons, could
lower the number of deaths annually in the United States from influenza,
pneumonia and hepatitis B infections. In 1994, The United States Department of
Health and Human Services estimated that the costs to society of diseases for
which vaccines currently exist exceeded $10 billion each year. As a result,
health-care providers, including managed care organizations, have increasingly
recognized that immunization of adults is a cost effective method for preventing
the incidence of disease and infection.
DTAP VACCINE. Vaccination against diphtheria, tetanus and pertussis is
mandated by most states for all children with a total of five doses administered
at two, four, six and between 15 to 18 months of age and immediately prior to
entering grade school. Prior to 1996, only combined diphtheria, tetanus and
"whole cell" pertussis ("DTP") vaccines were approved for use in the United
States for all recommended pediatric doses; however, within the past two years,
three DTaP vaccines have been licensed by the United States Food and Drug
Administration ("FDA") for all five doses of the pediatric immunization series.
The Company believes that DTaP vaccines are now replacing the "whole cell" DTP
vaccines and are preferred in the childhood immunization schedule recommended by
the Advisory Committee on Immunization Practices ("ACIP") of the U.S. Centers
for Disease Control and Prevention ("CDC") and the American Academy of
Pediatrics ("AAP"). The Company's acellular pertussis vaccine is unique and
distinct from all other pertussis vaccines in that it contains only pertussis
"toxoid" (i.e., pertussis toxin that has been purified and chemically
inactivated by hydrogen peroxide), instead of the entire Bordetella pertussis
bacteria or two or more of its components. Clinical studies have shown that the
- 3 -
<PAGE>
Company's toxoid induces immunity with fewer serious adverse reactions than the
"whole cell" pertussis vaccine. The Company holds exclusive licenses under
United States and foreign patents on the aP toxoid and the method of its
manufacture.
The Company's license applications for approval to market Certiva(TM)
in the United States are pending with the FDA. In addition, license applications
for the European formulation of Certiva(TM) are pending in several European
countries. See "Products Under Development - Acellular Pertussis Vaccines."
COMBINATION VACCINES. Using Certiva(TM) as an "anchor" for combining
additional pediatric vaccines, the Company is developing combination vaccines
that may be administered in a single injection. The Company believes that, in
many instances, these combination vaccines may replace stand-alone vaccines
because combination vaccines will reduce the number of required injections,
which could lower treatment costs and improve compliance with standard
vaccination schedules. The Company's first combination vaccine, DTaP-IPV,
combines an IPV with Certiva(TM). In September 1996, the Danish National Board
of Health granted Statens Seruminstitut ("SSI") of Copenhagen, Denmark approval
to market the DTaP-IPV vaccine for all primary and booster doses for infants and
children. In the United States, the ACIP and AAP have issued a revised
recommendation related to polio vaccination. A sequential schedule, including
two doses of IPV followed by two doses of oral polio vaccination ("OPV") is now
the preferred recommendation, although a four-dose OPV or four-dose IPV schedule
is acceptable. The Company has filed an investigational new drug application
with the FDA to conduct clinical trials with a DTaP-IPV in the United States.
The Company is pursuing regulatory approval of a DTaP-IPV vaccine in selected
European countries. The Company also is developing a DTaP-HIB vaccine that
combines the Company's DTaP vaccine with a vaccine against Haemophilus
influenzae type b ("HIB") infections, as well as a DTaP-IPV-HIB vaccine. See
"Products Under Development Combination Vaccines."
CONJUGATE VACCINES. The Company, using patented and proprietary
technologies, is developing several conjugate vaccines for prevention of
infectious diseases in children and adults. Conjugate vaccines are formed by
chemically linking (i.e., conjugating) polysaccharides to a "carrier" protein.
This procedure has been shown to enhance the immunogenic properties of the
polysaccharides, particularly in infants. Conjugate vaccines may be useful in
preventing several serious diseases, including meningitis, pneumonia and strep
throat in all groups, including infants and children. Vaccines are not currently
available for the prevention of several of these diseases. The Company is
currently participating in Phase II clinical trials in infants and children for
its Group C meningococcal conjugate vaccine in the United Kingdom, and a Phase
II clinical trial is being conducted for a vaccine against Group B streptococcal
infections utilizing patented technologies held by the Company. See "Products
Under Development - Conjugate Vaccines."
COLLABORATIONS. To further develop and expand its technologies in
pediatric and adult vaccines, the Company has established several relationships,
including licenses and collaborations with pharmaceutical companies,
universities and government agencies. Some of these institutions have provided
funding for clinical trials and research, and conducted joint development
projects with the Company. For example, the Company has entered into agreements
with Pasteur Merieux-Connaught to jointly develop the Company's new conjugate
vaccine against Group B meningococcal infection, for immunization of adults,
adolescents and infants.
- 4 -
<PAGE>
The Company also has entered into marketing alliances for its first
commercial products. For example, under an agreement with Abbott Laboratories
("Abbott"), Certiva(TM) will be marketed and distributed in the United States by
Abbott to the private physicians and managed care markets and by the Company to
government purchasers, including state governments and the CDC. See "Business
Relationships" and "Marketing of Vaccines."
ORGANIZATION. The Company was incorporated as a Canadian corporation on
August 31, 1989 for the purpose of acquiring American Vaccine Corporation, a
publicly held Delaware corporation ("American Vaccine"), and certain assets of
BioChem Pharma Inc., a publicly traded pharmaceutical company ("BioChem"), in a
share purchase and merger transaction (collectively described as the "Merger").
On February 28, 1990, shareholders of American Vaccine approved the Merger. The
Company had no operations prior to the Merger. Pursuant to the Merger, the
shareholders of American Vaccine received 50% ownership in the Company.
Simultaneously, BioChem purchased a 50% interest in the Company in exchange for
cash, shares of BioChem common stock, and the license or assignment and transfer
of certain rights and other intangible assets.
OVERVIEW OF VACCINE MARKET
PEDIATRIC VACCINES. Due to the potential for epidemic disease, most
countries consider vaccinations to be a matter of national importance. In the
United States, the ten vaccines generally required by state pediatric
vaccination programs are intended to prevent diphtheria, tetanus, pertussis,
measles, mumps, rubella, polio, HIB, hepatitis B and varicella (chicken pox). In
addition to these ten vaccines, the ACIP and AAP periodically review current
immunization practices and issue their recommendations for additional pediatric
vaccinations. In Western Europe, vaccination against diphtheria, tetanus and
pertussis is generally recommended, with each country establishing its own
vaccination schedules and requirements.
Children in the United States receive immunizations from public
providers, such as local health departments, and from private providers.
Immunizations provided by public providers are generally paid for through
federal and state government funding under public health programs. These
programs are intended to reduce barriers to immunization and to improve
immunization rates by providing free vaccine to qualifying infants and children.
Government purchases historically have been at prices substantially below those
offered to the private sector and presently account for a substantial proportion
of the vaccine doses distributed in the United States. In addition, the
government promotes the availability of an adequate supply of necessary
pediatric vaccines for United States public health programs. In order to achieve
this objective, the National Childhood Vaccine Injury Act of 1986 ("NCVI Act")
created a no-fault insurance program designed to compensate those who suffer
specified vaccine-related injuries associated with the administration of one or
more of the vaccines generally required by state pediatric vaccination programs.
This insurance program is funded through the levy of an excise tax paid by the
manufacturers on the sale of certain pediatric vaccines, including combined
diphtheria-tetanus-pertussis vaccines.
ADULT VACCINES. Adults, especially older persons who are at greater
risk of contracting and succumbing to disease and infection, can benefit greatly
from immunizations. In 1994, the United States Department of Health and Human
Services estimated that the costs to society of diseases for which vaccines
currently exist exceeded $10 billion each year. In addition, vaccines have been
widely recognized as highly cost-effective in preventing the incidence of
- 5 -
<PAGE>
disease and infection. For example, a 1995 study published in The New England
Journal of Medicine indicates that annual immunizations with influenza vaccine,
which costs approximately $10 per dose, reduce the medical costs and sick days
by more than $46 per patient immunized. Moreover, it is becoming widely
recognized that many childhood vaccine-preventable infections and diseases, such
as pertussis, are also found among younger adults, who serve as reservoirs for,
and source of pediatric exposure to, these infections and diseases. While the
size of the target populations for adult vaccines may vary and adult vaccination
rates tend to be low, some of these markets are much larger than the target
population for pediatric vaccines. The Company believes that the market for
adult vaccines will expand as health-care providers increasingly recognize
vaccines as a cost-effective method for preventing the incidence of disease and
infection.
PRODUCTS UNDER DEVELOPMENT
The Company is focusing its research and development efforts on the
vaccines set forth in Table 1 below. The Company spent $19.9 million, $11.6
million and $10.2 million on research and development of its products for 1997,
1996 and 1995, respectively. See Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operation. The summary information
included in Table 1 is provided solely for convenience of reference and is
qualified in its entirety by the detailed discussion of each of the Company's
products that follows. There can be no assurance that any of these vaccines will
be developed successfully by the Company or licensed by the FDA or any other
regulatory authority for commercial sale. See "Risk Factors-Need for Regulatory
Approvals" and "Risk Factors-Uncertainties Related to Clinical Trials."
- 6 -
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
PRODUCTS UNDER DEVELOPMENT
PRODUCTS DISEASE STATUS(1)
- ------------------------- ---------------------- ------------------
<S> <C> <C>
ACELLULAR PERTUSSIS VACCINES
Certiva(TM)...................... Diphtheria, tetanus and pertussis Licensed in Sweden; license
(whooping cough) applications pending in U.S. and
additional European countries
aP............................... Pertussis Licensed in Sweden for children
and young adolescents
TdaP............................. Tetanus, diphtheria and pertussis Phase II trial being planned
(adolescent/adult booster)
COMBINATION VACCINES
DTaP-IPV......................... Diphtheria, tetanus, pertussis Licensed in Denmark; license
and polio applications pending in other
European countries; IND filed for
Phase II clinical trials in U.S.
DTaP-HIB......................... Diphtheria, tetanus, pertussis Preclinical; clinical trial being
and meningitis planned
DTaP-IPV-HIB..................... Diphtheria, tetanus, pertussis, Trial ongoing in Sweden;
polio and meningitis clinical trial being planned
CONJUGATE VACCINES
Group B Streptococcal............. Neonatal sepsis and meningitis Phase II clinical trials
Group B Meningococcal............. Meningitis Clinical trial being planned
Group C Meningococcal............. Meningitis Phase II clinical trials commenced in
U.K. in infants and children
Group A/C Meningococcal........... Meningitis Preclinical
Group A/B/C Meningococcal......... Meningitis Preclinical
Haemophilus Influenzae
type b............................ Meningitis Preclinical; clinical trial being
planned
Group A Streptococcal............. Streptococcal pharyngitis (strep Preclinical
throat), skin infections, etc.
Pneumococcal (otitis media)....... Otitis media (middle ear Preclinical
infection)
Pneumococcal (pneumonia).......... Pneumococcal pneumonia Preclinical
</TABLE>
- --------------
(1) Preclinical development denotes work to refine product performance
characteristics and to conduct studies relating to product composition,
stability, scale-up, toxicity and efficacy in order to create a prototype
formulation in preparation for the filing of an investigational new drug
application or IND with the FDA for authority to commence testing in humans
(clinical studies). Phase I-III clinical trials denote safety and efficacy tests
in human patients in accordance with FDA guidelines as follows:
Phase I: Safety, immunogenicity, and optimal dosage studies.
Phase II: Detailed evaluations of safety, immunogenicity and optimal
dosage in limited number of subjects in target population.
Phase III: Evaluation of safety and efficacy in expanded target population.
See "Government Regulation."
- 7 -
<PAGE>
ACELLULAR PERTUSSIS VACCINES
BACKGROUND. Immunization against diphtheria, tetanus and pertussis
using a combined vaccine during infancy and childhood is a routine practice in
the United States, and the vaccination program is considered to be a major
factor in reducing the incidence of, and number of deaths associated with, each
of these diseases. Vaccination for the prevention of diphtheria, tetanus and
pertussis currently is required in the majority of states within the United
States and is scheduled to be administered to children at the ages of two, four,
six, 15 to 18 months, and 4 to 6 years of age. In addition, immunization against
diphtheria, tetanus and pertussis is also required in many countries outside of
the United States.
Since the late 1940s, the widespread use of "whole cell" DTP vaccines
led to a rapid decline in disease-related morbidity and mortality, especially in
children. These "whole cell" DTP vaccines include the entire Bordetella
pertussis bacterium that has been inactivated in the production process by heat
or chemicals, and it is generally believed that the use of the "whole cell"
Bordetella pertussis bacterium has been a leading cause of the adverse reactions
associated with the existing "whole cell" DTP vaccines. These adverse reactions
range from minor local reactions to more serious systemic reactions. Clinical
trials have established that acellular pertussis vaccines should offer
advantages over licensed "whole cell" pertussis vaccines with respect to
improved tolerability and fewer serious adverse reactions. The Company believes
that DTaP vaccines are now replacing the "whole cell" DTP vaccines and are
preferred for all doses in the immunization schedule recommended by the ACIP and
AAP. Currently, three DTaP vaccines have been licensed by the FDA for use in the
United States. In addition to the Company, one other firm has filed for
regulatory approval in the U.S. for its DTaP vaccine. See "Products Under
Development - Acellular Pertussis Vaccines - DTaP Vaccine" and "Competition."
DTAP VACCINE. The Company has developed Certiva(TM), an acellular
pertussis vaccine in combination with diphtheria and tetanus toxoids, for use as
a combined DTaP vaccine in childhood immunization programs. The Company's
acellular pertussis vaccine is unique and distinct from all other pertussis
vaccines in that it contains only pertussis toxoid (i.e., pertussis toxin that
has been purified and chemically inactivated by hydrogen peroxide), instead of
the entire Bordetella pertussis bacterium or two or more of its components. In
clinical trials, this single toxoid has been shown to induce immunity with fewer
serious adverse reactions than the "whole cell" pertussis vaccine. The method of
manufacture for this pertussis toxoid are the subject of United States and
foreign patents licensed exclusively to the Company. See "Business
Relationships."
Regulatory approval to market Certiva(TM) in the United States is
pending before the FDA. In January 1998, the Company was advised by the FDA that
Certiva(TM) is on track for completing the final steps for licensure. The
Company has prepared and submitted additional information to the FDA in
furtherance of its license application. The factors that may affect the timing
for, or the ability of the Company to secure, regulatory approval of Certiva(TM)
include the acceptability of the Company's submissions to FDA, the timeliness of
the FDA in completing its entire review process and the acceptability of the
Company's license applications in their entirety, among others. There can be no
assurances given that Certiva(TM) will receive regulatory approval in a timely
manner or at all. See "Risk Factors - Dependence Upon Approval and
Commercialization of DTaP Vaccines" and "Risk Factors Need for Regulatory
Approvals."
In February 1996, a license was granted to the Company's European
partner, SSI, to market in Sweden a European formulation of Certiva(TM) for all
recommended doses for infants and children. The Company's strategy is to file,
- 8 -
<PAGE>
or have filed on its behalf, regulatory applications in other selected European
countries. Approvals in any of these European countries can precede and
generally are not dependent upon filings with or approval by the FDA. See
"Marketing of Vaccines" and "Business Relationships." There can be no assurance
that the Company's regulatory filings will be accepted or receive regulatory
approval in a timely fashion or at all by the FDA or any foreign regulatory
authority. See "Risk Factors - Dependence Upon Approval and Commercialization of
DTaP Vaccine."
Since 1995, the Company has been working together with the Health and
Medical Services of Goteborg, Sweden in a mass vaccination project in Goteborg
using the Company's acellular pertussis vaccine to immunize, free of charge,
more than 60,000 infants and children, representing more than 80% of the
eligible pediatric population in the Goteborg metropolitan area. Under the
vaccination project, newborn infants are receiving a European formulation of
Certiva(TM) at 3, 5 and 12 months of age, which are the recommended vaccination
ages in Sweden. Additionally, pre-school children ages 1 to 5 years who have
previously received their required vaccinations for diphtheria and tetanus are
receiving three doses of the Company's stand alone aP vaccine. During 1997, the
Company announced preliminary results from the project. These results reveal
that, within the first year following the start of the project, vaccination with
these DTaP and aP vaccines has dramatically reduced the incidence of pertussis
infections in the Goteborg area and substantially reduced the number of
hospitalizations of infants due to complications from pertussis. Moreover, none
of the infants and children participating in the project have experienced any
serious vaccine-related adverse reactions following more than 150,000
injections. The Swedish mass vaccination project, which is providing the Company
with additional data on the widespread use of its vaccines, is not required in
order to obtain regulatory approval for Certiva(TM) and has not been requested
by any regulatory agency.
AP VACCINE. In April 1997, the Company's stand-alone aP vaccine
received regulatory and marketing authorization in Sweden. This approval
expanded the indication in Sweden for the Company's aP vaccine to children
previously vaccinated against diphtheria and tetanus, but who are still at risk
for pertussis, and is intended to permit physicians to vaccinate older children
and young adolescents against pertussis. The Company, directly or through one or
more distributors, intends to seek regulatory approval for sale of the
stand-alone aP vaccine for use in other European countries, although there can
be no assurance that any additional such approval will be granted.
The Company also believes that sale of a stand-alone acellular
pertussis vaccine may be appropriate for adult booster immunizations. Adults are
exposed to and may contract pertussis infections. They also are considered a
significant reservoir of, and source of pediatric exposure to, pertussis. The
Company participated in a safety and immunogenicity clinical trial at Baylor
College of Medicine, which was completed in 1995, for the purpose of
establishing the safety and immunogenicity of the aP vaccine as a booster in
adults. This clinical trial was sponsored by the National Institute of Allergy
and Infectious Diseases ("NIAID") of the National Institutes of Health, and the
results of this study reveal that the Company's aP vaccine is highly immunogenic
in adults with no vaccine associated severe adverse reactions. During 1997, the
Vaccine and Related Biologics Advisory Committee to the FDA recommended that
safety and immunogenicity trials alone would be adequate to support expanded
indication of aP vaccines for adolescent and adult booster doses. The Company is
presently considering sponsoring such safety and immunogenicity adult clinical
trials in the United States using its aP vaccine. As part of this process, the
Company intends to combine the aP vaccine with an adult formulation of tetanus
and diphtheria toxoids ("Td") to create a tetanus-diphtheria-acellular pertussis
("TdaP") vaccine for adults. The clinical research and development for a TdaP
vaccine are expected to be done concurrently with, or in lieu of, the clinical
development of the aP vaccine.
- 9 -
<PAGE>
COMBINATION VACCINES
The Company is developing three combination vaccines using Certiva(TM)
as an "anchor." Additional vaccines would be added to Certiva(TM) to form the
combination vaccine. The Company anticipates that these combination vaccines
will become generally acceptable because the ACIP/AAP recommended schedule for
immunization against diphtheria, tetanus, pertussis, polio and HIB are
compatible. Combination vaccines have a number of benefits, including fewer
injections, lower anxiety for the parents and potential reduction of the number
of required visits to the physician, thereby lowering costs and facilitating
compliance with recommended and mandated immunization programs. The Company's
combination vaccines under development are described below.
DTAP-IPV VACCINE. The Company believes that a single vaccination
program for diphtheria, tetanus, pertussis and polio can be established by
combining an enhanced, injectable IPV with Certiva(TM). The Company anticipates
that a DTaP-IPV vaccine can become a generally accepted multivalent vaccine
because the polio vaccination schedule is compatible with the DTaP vaccination
schedule, and because a polio vaccination program that includes IPV has been
accepted as both safe and efficacious. In the United States, the CDC has issued
a revised recommendation related to polio vaccination. A sequential schedule,
including two doses of IPV followed by two doses of oral polio vaccination
("OPV"), is now the preferred recommendation, although a four dose OPV or four
dose IPV schedule is acceptable.
In September 1996, the Danish National Board of Health granted SSI
regulatory approval to market a combined DTaP-IPV vaccine, which incorporates
the Company's acellular pertussis toxoid, for all primary and booster doses in
infants and children. This combination vaccine, which includes the Company's
acellular pertussis vaccine, was developed jointly by SSI and the Company, and
SSI holds the product rights in Denmark and other Scandinavian and Baltic
countries.
In 1997, regulatory filings for the DTaP-IPV vaccine were prepared and
filed in other European countries. In addition, the Company in collaboration
with Abbott has filed an investigational new drug application with the FDA to
conduct Phase II clinical trials in the United States with a DTaP-IPV vaccine.
There can be no assurance that the clinical trial will commence, that data from
the clinical trials will support a regulatory filing or that any regulatory
filings for the DTaP-IPV will be accepted, or receive regulatory approval in a
timely fashion or at all, by other regulatory agencies. See "Government
Regulation" and "Risk Factors - Need for Regulatory Approvals." See "Business
Relationships."
DTAP-HIB VACCINE. The Company is developing a combined single
injectable DTaP-HIB vaccine in stable liquid form for the prevention of
diphtheria, tetanus, pertussis and infection caused by Haemophilus influenzae
type b. Preclinical test results of the Company's DTaP-HIB vaccine demonstrated
high immune responses for each of the components in the combined vaccine and
showed no immunologic interference among the different components of the
vaccine. The Company believes that the development of a safe and immunogenic
DTaP-HIB vaccine is technologically feasible, and that a program utilizing that
vaccine can become generally accepted for a number of the doses in the
vaccination schedule because the vaccination schedules for diphtheria, tetanus,
pertussis, and HIB are compatible. The Company is presently planning clinical
trials for a DTaP-HIB vaccine in the United States. See "Products Under
Development - Conjugate Vaccines - Haemophilus Influenzae Type b Vaccine" for a
description of the Company's HIB vaccine. See also "Competition." The Company is
collaborating with Abbott in the development of this vaccine. See "Business
Relationships."
- 10 -
<PAGE>
DTAP-IPV-HIB VACCINE. The Company is also developing a combined single
injectable DTaP- IPV-HIB vaccine in stable liquid form for the prevention of
diphtheria, tetanus, pertussis, polio and infection caused by HIB. Preclinical
test results of this vaccine demonstrated high immune responses for each of the
components in the combined vaccine and showed no interference among the
different components of the vaccine. The Company believes that the development
of a DTaP-IPV-HIB vaccine is technologically feasible, and that a program
utilizing that vaccine can become generally accepted for a number of the doses
in the vaccination schedule because the vaccination schedules for diphtheria,
tetanus, pertussis, polio and HIB are compatible. The Company is presently
planning clinical trials of the DTaP-IPV-HIB vaccine. The Company is
collaborating with Abbott in the development of this vaccine. See "Business
Relationships." See also "Products Under Development - Conjugate Vaccines -
Haemophilus Influenzae Type b Vaccine" for a description of the Company's HIB
vaccine.
CONJUGATE VACCINES
In recent decades, vaccines have been developed for certain bacterial
diseases using polysaccharides (long-chained sugars) that coat or encapsulate
certain bacteria's outer membranes. While these polysaccharide vaccines have
generally proven to be safe, many of them do not elicit an adequate immune
response, particularly in infants whose immature immune systems do not recognize
or respond to these polysaccharides. In an attempt to address this problem, the
Company is utilizing proprietary conjugate vaccine technology to link (i.e.,
conjugate) polysaccharides to protein carriers, which serve to enhance the
immunogenic properties of the polysaccharides by effectively carrying or showing
the polysaccharide to the immune system. The Company believes that conjugate
vaccines may prove as safe as and more effective than polysaccharide vaccines.
The Company holds exclusive worldwide rights (excluding Canada) for the
development, production and sale of vaccines against certain bacterial
infections under a license granted by the National Research Council of Canada, a
Canadian federal government agency ("NRC"), for certain conjugate vaccine
technology. United States and, in some cases, foreign patents relating to this
technology have been issued and applied for. The Company also holds, either as
assignee or licensee, several other patents related to the development and
manufacture of conjugate vaccines. The Company is developing conjugate vaccines
for the diseases discussed below and, where appropriate, intends to combine
certain of its conjugate vaccines with its DTaP and DTaP-IPV vaccines. See
"Products Under Development Combination Vaccines" and "Business Relationships."
GROUP B STREPTOCOCCAL VACCINE. Group B streptococcal ("GBS") infection
affects all age groups in the United States and is the most common cause of
life-threatening infections, including sepsis meningitis in newborns. GBS
infections in infants occur principally during the first three months after
birth and can result in serious complications, including death, pneumonia or
permanent brain damage from meningitis. Disease in newborns during the first
week of life generally is caused by infection of the infant passing through the
mother's colonized birth canal. GBS disease is also a prominent cause of
peripartum maternal infections. Since there is no vaccine for the prevention of
GBS disease in adults or infants, the CDC has issued guidelines for detecting
and treating GBS infections in pregnant women. These guidelines, which have been
adopted by the American Academy of Pediatrics and the American College of
Obstetricians and Gynecologists, include diagnostic testing during the third
trimester and, for those infected, a course of intravenous antibiotics during
and after labor. A primary target market for this vaccine will be women of
child-bearing age. A principal benefit to such an immunization program is that
the vaccine has the potential to generate protective antibodies for both the
mother and the infant.
- 11 -
<PAGE>
A vaccine against GBS infection, utilizing patented technologies that
the Company has licensed from the NRC, the Brigham and Women's Hospital, and
Harvard University, has been tested in a Phase I/II clinical trial conducted
under the sponsorship of the NIAID. In that trial, the vaccine was well
tolerated with minimal reactogenicity and no serious side-effects in healthy,
nonpregnant women subjects. Antibodies elicited by immunization with the
conjugate vaccine displayed protective activity against multiple GBS serotypes
in vitro and in vivo. In addition, the clinical investigators reported that the
delivery of a GBS polysaccharide conjugate vaccine through maternal immunization
may be a realistic approach to the prevention of perinatal GBS infection and
that antibodies transported through the placenta to the fetus may confer
protective immunity even to infants born prematurely between 34 and 37 weeks of
gestation. Trials for this GBS vaccine have been expanded, and the vaccine is
currently in Phase II clinical trials. The Company is presently planning a Phase
III clinical study for its vaccine in nonpregnant adolescent girls and women.
MENINGOCOCCAL VACCINES. Meningitis is a serious infection involving the
fluid surrounding the brain and spinal cord, which can lead to significant
central nervous system damage in all age groups, although in the United States
those most often stricken are children and young adults. Serogroups A, B and C
of Neisseria meningitidis (meningococcus) cause a significant number of cases of
meningitidis and systemic meningococcemia. The incidence of meningitis caused by
Group A, B and C meningococcus varies from country to country, with Group B and
C meningococcus accounting for nearly all disease in developed countries.
Currently, a polysaccharide vaccine for the prevention of Group A and C
meningococcal infections is licensed in the United States and is predominantly
used in the adult population, and in particular, is routinely administered to
United States military personnel. This vaccine has not been demonstrated to be
protective in children less than two years of age. In addition, there is
currently no licensed conjugate vaccine for the prevention of Group B
meningococcal infection.
Group B meningococcal bacteria have been responsible for most cases of
meningococcal meningitis in developed countries since the late 1940s, and in the
United States account for approximately one-half of the yearly cases of such
meningitis (the other half being attributable principally to Group C
meningococcal bacteria). Epidemic outbreaks occur periodically in the United
States, South America and Europe. The Company has developed a Group B
meningococcal conjugate vaccine utilizing an unique carrier protein which
appears to reduce many of the previously reported problems associated with the
development of an effective Group B meningococcal polysaccharide vaccine. At the
end of 1995, the Company entered into agreements with Pasteur Merieux-Connaught
to jointly develop this conjugate vaccine, and the two companies successfully
collaborated in 1997 on preclinical primate studies for this Group B
meningococcal conjugate vaccine that confirmed its safety and immunogenicity.
These studies demonstrated that the conjugate vaccine made using the Company's
proprietary technologies elicited in vivo superior bactericidal responses to
other Group B meningococcal vaccines. In addition, the Company and Pasteur
Merieux-Connaught together are planning to file an investigational new drug
application with the FDA to begin a Phase I clinical trial in adults. See
"Business Relationships - Pasteur Merieux-Connaught Agreements."
The Company is also developing conjugate vaccines against Group A and C
meningococcal disease and Group A/C and Group A/B/C meningococcal disease for
adults and infants. The Company has completed preclinical development and
testing of its Group A and Group A/C meningococcal conjugate vaccines, as well
as a Phase I clinical trial of its Group C meningococcal conjugate vaccine in
adults. The results from the Phase I clinical trial in the United Kingdom
revealed that the Group C meningococcal vaccine was well tolerated with minimal
reactogenicity and no serious side-effects. Antibodies elicited by immunization
with the conjugate vaccine displayed protective activity against Group C
- 12 -
<PAGE>
meningococcal bacterial infection by eliciting functional bactericidal
antibodies. The Company is presently participating in Phase II clinical trials
of the vaccine in infants and children in the United Kingdom to assess the
safety and immunogenicity of the vaccine, and expects to participate in a
clinical study of the vaccine in U.K. adolescents. The clinical development and
testing of these vaccines are expected to take several years to complete.
HAEMOPHILUS INFLUENZAE TYPE B VACCINE. HIB has been a frequent cause of
meningitis and other serious infections in infants and children. The ACIP has
issued a recommendation for universal vaccination of children for protection
against diseases caused by HIB. Vaccination against HIB consists of either a two
or three dose primary regimen (depending on vaccine used), with primary doses
administrated at the ages of two, four and six months and a booster dose
administered at between 12 to 15 months of age. Children infected with HIB
bacteria can develop meningitis, which can lead to blindness, deafness, acquired
mental retardation or death. The peak incidence of HIB infection in the United
States occurs in children between six and 18 months of age. The Company has
developed more than one conjugate vaccine against HIB for use in infants and
children and for possible use in the Company's combination vaccines. See
"Products Under Development - Combination Vaccines." The Company has completed
its preclinical development of these vaccines. Three manufacturers are currently
licensed by the FDA to sell HIB conjugate vaccines for use in all primary and
booster doses. See "Competition."
GROUP A STREPTOCOCCAL VACCINE. Group A streptococcal disease occurs in
all age groups with a predominance in school-age children. Group A streptococcus
causes infections ranging from severe sore throat and sinus infection to
pneumonia and toxic streptococcal syndrome. Sequelae of Group A streptococcal
infections include rheumatic fever and glomerulonephritis. Currently, there is
no vaccine licensed by the FDA to prevent Group A streptococcal infection. The
Company is engaged in the research and development of a conjugate vaccine to
prevent this infection. Activities on this vaccine are in the preclinical stage.
PNEUMOCOCCAL (OTITIS MEDIA) VACCINE. Otitis media, or middle ear
infection, is a common illness in the United States afflicting children under
five years of age. The majority of bacterial cases are attributable to
pneumococcal organisms. Chronic otitis media can lead to hearing defects and
associated learning and language disabilities. There is no vaccine licensed by
the FDA that prevents otitis media caused by pneumococcal bacteria. The Company
is pursuing efforts to develop a conjugate vaccine to prevent pneumococcal
otitis media. This vaccine is currently in the preclinical stage of development.
PNEUMOCOCCAL (PNEUMONIA) VACCINE. There are in excess of 20 serotypes
of pneumococcal bacteria that cause pneumonia, a respiratory infection that
affects individuals of all ages, as well as other infections. The present
pneumococcal vaccine is a multivalent polysaccharide vaccine recommended for
adults, particularly elderly and other patients with a high risk of contracting
pneumonia. The Company is currently in the preclinical stage of the development
of a multivalent conjugate vaccine against pneumococcus.
OTHER VACCINES
The Company, utilizing patented and proprietary technologies, is
performing research on and developing other adult and pediatric vaccines, which
it selects for development based on the anticipated need for a particular
product, the nature of the competition, and the ability of the Company to
develop the product, among other factors. The Company's research and development
efforts are being conducted independently and in conjunction or in collaboration
- 13 -
<PAGE>
with governmental agencies and universities. There are no assurances that any of
these vaccines will enter clinical trials or successfully be developed or
licensed by the FDA or any other regulatory authority for commercial sale.
MARKETING OF VACCINES
An objective of the Company is to become a leader in the development,
production and marketing of state-of-the-art vaccines for the prevention of
human infectious diseases. In pursuing this objective, the Company considers,
among other things, collaborations with pharmaceutical and other vaccine
manufacturers where appropriate to maximize the value of the Company's products
and technologies. To maximize market penetration for its first commercial
products within the least amount of time, the Company currently is implementing
a marketing strategy aimed at establishing marketing alliances in the United
States, Europe and other territories with well-established local partners on a
country-by-country basis. Thereafter, the Company intends to develop, where
appropriate and feasible, an internal sales force to succeed these alliances
following expiration of the respective agreements. Towards this end, the Company
has entered into marketing alliances for certain products in the United States
and selected countries within Europe. The Company will continue to seek
distribution, marketing, joint venture and similar arrangements with third
parties in other territories and for other products where, in the judgement of
the Company, such arrangements would be beneficial to the successful
commercialization of its products. See "Business Relationships." All of the
Company's product sales in 1997 and 1996 were for export of the Company's
acellular pertussis vaccine from the United States and were stated in U.S.
dollars. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation. The backlog of orders believed to be firm
for the Company's acellular pertussis vaccine was approximately $1 million as of
December 31, 1997. The Company did not have a backlog of firm orders as of
December 31, 1996. The Company does not consider orders for any of the Company's
products to be firm until such time as regulatory approval is obtained for each
such product.
In addition to establishing these commercial alliances, the Company is
developing an internal marketing and sales organization and is preparing for the
product launch of Certiva(TM) in the United States upon receipt of regulatory
approval. The Company intends to market Certiva(TM) directly to federal and
state governments through established purchasing programs. In the United States,
federal and state governments currently purchase a substantial portion of
pediatric vaccines sold, and the Company expects that such governments will
continue their historical practice of purchasing DTaP and other vaccines from
multiple licensed commercial manufacturers through these established programs,
although there are no assurances in this regard. This is a forward looking
statement made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward looking statements inherently involve
risks and uncertainties that may affect the Company's business and prospects,
including without limitation the requirement for regulatory approval of products
by the FDA, nature of competition, effective marketing, and uncertainties
relating to clinical trials, all as discussed under the heading "Risk Factors",
below. See "Risk Factors - Changes in Government Purchasing Policies," "Risk
Factors - No Assurance of Effective Marketing" and "Risk Factors - Need for
Regulatory Approvals." Presently, the U.S. government is continuing with
multiple contract awards for the purchase of its annual requirements of DTaP
vaccine. Under these contracts, vaccine suppliers effectively will not be
guaranteed any minimum purchase requirements, but they will be provided the
opportunity to revise their contract proposals on a quarterly basis.
To successfully introduce and commercialize Certiva(TM) in the United
States, the Company will be required, among other things, to participate
- 14 -
<PAGE>
successfully in established purchasing programs of Federal and state
governments, to establish an identity and reputation for the Company and its
products, to create an awareness among pediatricians of the safety and efficacy
of the vaccine, to distinguish the Company's products from that of its
competitors, to establish the Company as an effective and reliable supplier of
vaccines, to establish efficient and consistent production of sufficient
quantities of vaccine and to establish effective distribution channels. There
can be no assurance that the Company will be able to successfully market its
vaccine products, that its existing business relationships will prove to be
commercially successful, or that it will successfully negotiate and execute any
additional commercial arrangements with third parties. See "Business
Relationships," "Competition" and "Risk Factors - No Assurance of Effective
Marketing."
BUSINESS RELATIONSHIPS
PERTUSSIS LICENSE AGREEMENT. The process by which the Company's
pertussis toxin is inactivated is the subject of a United States patent held by
the United States Government, which has been licensed exclusively to the
Company. The patent is scheduled to expire on August 9, 2005. The Company's
exclusive rights will expire seven years from the date of the first commercial
sale of the product in the United States following licensing of such product for
general use by the FDA. The Company is required to pay the United States
Government a royalty based on net sales of a vaccine that utilizes the patented
technology. Foreign patent applications covering this technology have been filed
and ten unexpired foreign patents are issued with expiration dates ranging from
2002 to 2007. The Company has acquired a royalty-bearing exclusive license for
the use of the patented technology in all such foreign jurisdictions for the
full term of the patents. See "Products Under Development - Acellular Pertussis
Vaccines."
CANADIAN GOVERNMENT LICENSE AGREEMENTS. The Company is the assignee
under two license agreements between BioChem and the Canadian Government
covering the conjugate technology being developed by the Company. These license
agreements currently cover a total of twenty-two issued patents with expiration
dates ranging from 1997 to 2014, and the Company and the Canadian Government
have applied for additional patents, which, if issued, would be licensed to the
Company under these agreements. The Company is required to pay the Canadian
Government royalties on the sale of licensed vaccines. In the event of a change
in control of the Company, the Canadian Government retains the right to
terminate both agreements if it believes such change in control is detrimental
to the Canadian Government. The Canadian Government also can terminate the
license agreements if all reasonable efforts are not being used to exploit the
technology commercially with due diligence. Under one license agreement, the
Company has the exclusive worldwide rights (excluding Canada) for the
development, production and sale of vaccines produced in accordance with the
conjugate vaccine technology covered by the license. The vaccines covered
include, among others, those against meningococcal, Haemophilus influenzae type
b, Group B streptococcal and pneumococcal infections. The term of the license is
co-extensive with the term of the patents. Currently, the last-to-expire patent
licensed under this agreement is scheduled to expire in 2014. Under the second
license agreement, the Company has the exclusive worldwide rights (excluding
Canada) for the development, production and sale of a vaccine against Group B
meningococcal disease produced in accordance with the licensed technology. The
term of the license is co-extensive with the terms of the patents. Currently,
the last-to-expire patent licensed under this agreement is scheduled to expire
in 2014. See also "Products Under Development - Conjugate Vaccines."
STATENS SERUMINSTITUT SUPPLY AGREEMENTS. In 1991, the Company and SSI
executed a supply agreement under which SSI is required to supply the Company
- 15 -
<PAGE>
with its requirements of diphtheria and tetanus toxoids to be used by the
Company for developing, producing and selling the DTaP vaccine, either alone or
as a combination vaccine. The Company has been using these diphtheria and
tetanus toxoids in producing its DTaP vaccine. In the event SSI fails to
continue to supply the Company with these components, the Company has a
royalty-bearing license to produce the diphtheria and tetanus toxoids. The
Company's right to purchase diphtheria and tetanus toxoids for sale of such
products is exclusive in certain designated countries and nonexclusive in the
rest of the world with the exception of Scandinavia, the Baltics and other
select countries ("SSI's Territory"). The contract has a term of 20 years. The
Company and SSI also have entered into another supply agreement pursuant to
which the Company has agreed, on an exclusive basis, to supply SSI with the
pertussis toxoid for combination with diphtheria and tetanus toxoids either
alone or together with other antigens for sale in SSI's Territory.
In February 1992, the Company signed two additional supply agreements
with SSI. Under the first supply agreement, SSI has agreed, on an exclusive
basis, to provide the Company with diphtheria and tetanus toxoids for use as
carrier proteins in the development and manufacture of the Company's conjugate
vaccines. In the event that SSI fails to continue to supply the Company with
these components, the Company has a royalty-bearing license to produce
diphtheria and tetanus toxoids for this purpose. Under the second supply
agreement, the Company has agreed, on an exclusive basis, to supply SSI with its
conjugate vaccines that utilize SSI's diphtheria or tetanus toxoids as a carrier
protein, solely for use by SSI in combination with DTaP and DTaP-IPV vaccines in
SSI's Territory. SSI's right to market and sell these products is exclusive in
SSI's Territory. These agreements have a term of 20 years.
STATENS SERUMINSTITUT RESEARCH AND DEVELOPMENT AGREEMENT. In 1991, the
Company entered into a research and development agreement with SSI under which
the parties agreed to collaborate on the development of a DTaP-IPV vaccine. See
"Products Under Development Combination Vaccines." The agreement permits either
party to add other antigens to the DTaP-IPV product. Once the Company obtains
regulatory approval, and commences sales of the DTaP-IPV product, it will be
required to make royalty payments to SSI. SSI is required to sell to the Company
all of its requirements of IPV for the purpose of developing, producing and
selling the DTaP-IPV product, either alone or together with other antigens. The
contract has a term of 20 years.
STATENS SERUMINSTITUT DISTRIBUTION AGREEMENTS. The Company has been
designated the exclusive distributor in North America and the United Kingdom for
SSI's diphtheria, tetanus and IPV vaccines. Additionally, SSI will be the
exclusive distributor in various countries for the conjugate vaccines
manufactured using the components supplied to the Company by SSI. These
agreements were executed in February 1992, and each agreement has a term of 10
years.
TECHNOLOGY TRANSFER AGREEMENT WITH BIOCHEM. In 1990, in addition to the
conjugate vaccine technologies described above, BioChem transferred to the
Company all rights to certain vaccine technologies and granted to the Company a
paid-up exclusive right (excluding Canada) and license to other technologies for
vaccine applications, including those relating to monoclonal antibodies,
synthetic peptides and adjuvants. The licenses granted under this agreement
generally will not terminate until the expiration of the last valid patent or
copyright anywhere in the world for the licensed technologies or until the last
portion of the technologies protected by trade secrecy enters the public domain
everywhere in the world, whichever occurs last. Currently, this agreement covers
seven foreign patents with expiration dates that range from 2007 to 2011.
- 16 -
<PAGE>
PASTEUR MERIEUX-CONNAUGHT AGREEMENTS. At the end of 1995, the Company
entered into a clinical development agreement and a license agreement with
Pasteur Merieux-Connaught under which both parties will jointly develop the
Company's new conjugate vaccine against Group B meningococcus for both adult and
pediatric indications. Total fees and payments to the Company under these
agreements would amount to $52 million upon achievement of all clinical and
regulatory milestones. In addition, Pasteur Merieux-Connaught will be
responsible for all costs associated with the clinical development of the
vaccine through the completion of Phase II clinical trials. See "Products Under
Development - Conjugate Vaccines - Meningococcal Vaccines."
To date, the Company has received payments from Pasteur
Merieux-Connaught in connection with this project in the amount of $13 million.
Further fees and funding will 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 $39
million. See Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operation.
Under the terms of the license agreement, Pasteur Merieux-Connaught
will hold co-exclusive world-wide rights to manufacture and sell the Group B
meningococcal vaccine both as a stand-alone product and in combination with
other vaccines. The Company will retain co-exclusive world-wide rights to
manufacture and sell the Group B meningococcal vaccine both as a stand-alone
product and in combination with other vaccines. With limited exceptions, neither
party may grant sublicenses under the technology. Following first product
approval, the Company will receive annual minimum royalties and running
royalties on product sales by Pasteur Merieux-Connaught. Pasteur
Merieux-Connaught is subject to specific diligence obligations in the
development and commercialization of the vaccine. The obligations of Pasteur
Merieux-Connaught will be reduced in the event of a change of control of the
Company involving certain specified corporations. The license agreement may be
terminated by Pasteur Merieux-Connaught in its sole discretion at any time with
advance notice. The Company may terminate the license agreement upon Pasteur
Merieux-Connaught's default or its failure to meet its obligations under the
clinical development agreement.
Under the terms of the clinical development agreement, the parties will
jointly develop the vaccine through Phase II clinical trials, and each party
will have access to and the right to use the clinical trial results. Pasteur
Merieux-Connaught will be responsible for all costs associated with the clinical
development of the Group B meningococcal vaccine through the completion of Phase
II clinical trials. Pasteur Merieux-Connaught's obligations will terminate upon
a change of control of the Company involving certain specified corporations.
Pasteur Merieux-Connaught is subject to specific diligence obligations in the
development and commercialization of the vaccine. The agreement may be
terminated by Pasteur Merieux-Connaught in its sole discretion at any time with
advance notice.
ABBOTT LABORATORIES AGREEMENT. In October 1996, the Company and Abbott
signed a definitive agreement under which Abbott would market Certiva(TM) when
approved by the FDA. The marketing agreement also will allow Abbott to market
the Company's DTaP-IPV vaccine, and DTaP-HIB and DTaP-IPV-HIB combination
vaccines that incorporate one of the Company's Haemophilus influenzae type b
conjugate vaccines under development.
Abbott will market Certiva(TM) and 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 CDC.
- 17 -
<PAGE>
On execution of the agreement with Abbott, the Company received $13
million of which $6.3 million represented payment for 350,000 shares of the
Company's Common Stock, and the balance represented a marketing fee and a
clinical development payment. The Company and Abbott will collaborate in the
clinical development of the combination vaccines, and Abbott will provide the
Company with clinical development funding. The Company will receive payments
upon achievement of prescribed milestones. The agreement provides for total
payments of up to $42 million by Abbott, of which the Company has received $16
million to date. 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. Each party is subject to prescribed diligence
obligations. The agreement will expire on the expiration of the patents covering
the products to be marketed. In addition, the agreement may be terminated by
Abbott in its sole discretion at any time with advance notice. See Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
OTHER RELATIONSHIPS. The Company holds licenses and other rights to
additional technologies that the Company is researching and/or developing
jointly with various research institutions. In addition, the Company is in
various stages of discussions with third parties, including multinational
pharmaceutical companies, regarding various business arrangements, including
acquisitions, licensing, research and development, distribution, marketing,
joint venture 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 agreement or that, if executed, the
financial terms of any such agreement will be significant.
COMPETITION
Competition in the vaccine industry is intense. The Company will face
competition from many companies, including a number of large companies and
specialized firms in the United States and abroad that are engaged in the
development and production of vaccines, and major universities and research
institutions. Many of the Company's competitors have substantially greater
financial and other resources, more extensive experience in conducting clinical
testing and obtaining regulatory approvals for their products, greater operating
experience, larger research and development and marketing staffs, and greater
production capabilities than those of the Company. The Company believes that the
principal competitive factors in the vaccine industry are product quality,
measured by the safety and efficacy of a vaccine product, ease of administration
(represented by combination vaccines and vaccines that are stable in liquid
form) and price. See "Marketing of Vaccines."
The Company believes that its principal competitors in the United
States are Wyeth-Lederle (a subsidiary of American Home Products), Merck & Co.,
SmithKline Beecham plc, and Pasteur Merieux-Connaught, most of which are active
in the development of acellular pertussis, combination and conjugate vaccines
for use in infants and children. For example, over the past two years, three
companies announced that they had received FDA approval for their DTaP vaccine
for infants and children. One of these competitors also announced that the FDA
licensed a vaccine that combines by reconstitution that company's HIB vaccine
with its DTaP vaccine for administration at 15-18 months of age and that it
continues to seek FDA approval for administration of this combination vaccine at
two, four and six months of age. In addition, several competing DTaP vaccines
and certain combination vaccines have been licensed for sale outside of the
United States. See "Risk Factors - Competition and Technological Change."
- 18 -
<PAGE>
PATENTS AND PROPRIETARY INFORMATION
The Company actively pursues a strategy of seeking patent protection
for valuable patentable subject matter. The Company believes that patent and
trade secret protection is an important element of its business and that its
success will depend in part on its ability to obtain strong patents, to maintain
trade secret protection, and to operate without infringing the proprietary
rights of third parties. The Company holds as assignee and licensee a number of
patents and patent applications. See "Business Relationships" and "Risk Factors
- - Patent Protection and Proprietary Information."
The Company also relies upon trade secrets, know-how and continuing
technological advancement to develop and maintain its competitive position.
Disclosure and use of the Company's know-how is generally controlled under
agreements with the parties involved. In addition, the Company has
confidentiality agreements with its employees, consultants and officers. There
can be no assurance that disclosure of the Company's trade secrets will not
occur, or that others will not independently develop and patent equivalent
technology.
GOVERNMENT REGULATION
The Company is currently subject to regulation by various governmental
agencies and to Federal and other laws. United States and foreign regulations
will be a significant factor in the production and marketing of the Company's
products and are currently a significant factor in its ongoing research and
development activities. In order to test, produce and market vaccines, mandatory
procedures must be followed to ensure that safety, quality and efficacy
standards established by the FDA and comparable agencies in foreign countries
are satisfied. See also "Risk Factors - Changes in Government Purchasing
Policies" for a description of regulatory and legislative initiatives that may
affect the marketing and distribution of vaccines.
In the United States, the marketing of human vaccines is subject to FDA
review and approval. The steps required before a new human vaccine can be
marketed include: preclinical studies; the filing of an investigational new drug
application ("IND") with the FDA; clinical trials in humans to determine safety
and efficacy; the filing of a product/establishment license application; FDA
approval of the product for commercial sale; and FDA approval of the
production-related facilities. The results of the preclinical studies and human
clinical trials are submitted to the FDA in a product license application
("PLA"), approval of which must be obtained prior to commencement of commercial
sales. The FDA may deny a PLA if, among other reasons, clinical trial protocols
are not adequate or appropriate. The FDA also may require additional testing or
information to assess the safety and efficacy of a company's products if the FDA
does not view the PLA as containing adequate evidence of the safety and efficacy
of the product. Notwithstanding the submission of such data, the FDA may
ultimately decide that the application does not satisfy its regulatory criteria
for approval. Even if the PLA is approved, the product may be required to
undergo post-licensure testing and surveillance to continue to monitor its
safety and effectiveness. At this stage, product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing. These regulatory standards relate to, among other
things, manufacturing, testing, labelling, advertising and marketing. The
interval between the filing of an IND and the filing of a PLA application can be
lengthy and in some instances the data obtained from clinical trials authorized
under an IND do not support the filing of a PLA.
The product manufacturing and support facilities also must be licensed
for the production of vaccines. To accomplish this, an establishment license
application ("ELA") must be filed with the FDA. The ELA describes the
- 19 -
<PAGE>
facilities, equipment and personnel involved in the manufacturing process. An
establishment license is granted on the basis of inspections of the applicant's
facilities in which the primary focus is on compliance with FDA's current good
manufacturing practices ("CGMP") and the applicant's ability to consistently
manufacture the product in the facility in accordance with the PLA. If the FDA
finds the inspection unsatisfactory, it may decline to approve the ELA,
resulting in a delay in production or distribution by the applicant. Although
reviewed separately, approval of both the PLA and ELA must be received prior to
commercial marketing of a vaccine.
The FDA Modernization Act of 1997, which became effective on February
16, 1998, is intended to reform the FDA's review and approval processes by,
among other things, streamlining the product licensing application processes for
biologics, including vaccines. Provisions of the new law are designed to
eliminate the requirement for separate ELAs and to simplify the approval
process. The FDA is in the process of developing implementing regulations and
guidelines, which is expected to take months and perhaps years to complete. At
this time the Company is unable to predict the effect that this new law or its
implementing regulations and guidelines may have on the FDA's application or
approval process for Certiva(TM) or the Company's other vaccines, or on the
Company's business or results of future operations.
The FDA Export Reform and Enhancement Act of 1996, which became
effective on April 26, 1996, revised the terms and conditions under which
biologics may be exported. The legislation was designed to facilitate the export
of drugs, including biologics. The new legislation now permits, provided that
certain conditions are satisfied, a company to commercially export vaccines
manufactured in the United States with little or no prior FDA review or approval
before these vaccines are licensed by the FDA for marketing in the United
States.
Preclinical studies are conducted in the laboratory and in animal
systems to evaluate the safety, immunogenicity and potential efficacy of
vaccines. The results of these preclinical studies are submitted as part of the
IND. Human clinical trials may commence if, 30 days after receipt by the FDA of
the IND, the FDA does not notify the IND applicant that the trials are subject
to a clinical hold.
Clinical trials involve the administration of the investigational new
vaccine to healthy volunteers or to patients, under the supervision of a
qualified principal investigator. Clinical trials are conducted in accordance
with certain standards under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND and is
subject to FDA approval. Further, each clinical study must be conducted under
the auspices of an independent Institutional Review Board ("IRB") at the
institution at which the study will be conducted or by a qualified centralized
independent IRB. The IRB must approve the study to be conducted. In its review,
the IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the vaccine into
healthy human subjects, the vaccine is tested for safety (adverse effects),
optimal dosage, and its ability to induce an immune response (immunogenicity).
Phase II involves studies in limited target patient populations to further
evaluate immunogenicity and optimal dosage, and to identify possible adverse
effects and safety risks. When a product is found to have an acceptable safety
profile in Phase II evaluations, Phase III clinical trials are undertaken to
evaluate clinical efficacy or some measure thereof and to further test for
safety within an expanded target patient population at geographically dispersed
clinical study sites.
- 20 -
<PAGE>
Clinical trials generally require several years to complete and may be
very costly. To date, the Company has been successful in reducing the cost of
clinical trials by obtaining third-party sponsorship of the clinical trials for
its first vaccine products. The Company, where appropriate, may continue to seek
third-party sponsorship or funding for clinical trials for its vaccine products.
There can be no assurance that such sponsorship or funding, if sought, will be
obtained.
The Company's activities are subject to specific government quality
assurance regulations. The FDA's CGMP regulations set specific requirements for
the production of biologics, including vaccines, and the failure to satisfy
these regulations can result in delays in, or suspension or withdrawals of,
export authorizations or U.S. regulatory approvals. Similar requirements are
also in effect in the European Union and other foreign countries where the
Company has applied or may apply for regulatory approval for clinical studies
and/or marketing of its vaccines. The Company's research and operations also are
subject to regulation by the Occupational Safety and Health Agency, the
Environmental Protection Agency, the Department of Agriculture, and the
Department of Transportation. The Company also is subject to regulation under
the Toxic Substances Control Act, the Resource Conservation and Recovery Act,
and other regulatory statutes, and may in the future be subject to other
Federal, state, local or foreign regulations. The Company's compliance with laws
that regulate the discharge of materials into the environment or otherwise
relate to the protection of the environment does not have a material effect on
the ongoing operations of the Company. The Company has not made any material
expenditures for environmental control facilities, nor does it anticipate any
such expenditures during the current fiscal year.
RAW MATERIALS
Laboratory supplies utilized in the Company's research and development
generally are available from several commercial suppliers under standard terms
and conditions. Most raw materials necessary for process development, scale-up
and commercial manufacturing are generally available from multiple commercial
suppliers. However, certain processes require raw materials from sole sources or
materials that are difficult for suppliers to produce and certify to the
Company's specifications. In addition, the Company may experience temporary or
permanent shortages of critical raw materials necessary for continued production
of its vaccines. Accordingly, given the specific nature of, and critical need
for, certain raw materials, there is a risk that material shortages could delay
production efforts, adversely impact production costs and yields, and even
necessitate the use of substitute materials. Any of these events could have a
significant adverse impact on the Company's operations. See also "Risk Factors
Dependence on Suppliers."
PRODUCT LIABILITY
The testing and marketing of vaccines entail an inherent risk of
product liability attributable to unwanted and potentially serious health
effects. The extent of this risk was sufficiently great in the United States
that, by the mid-1980s, many manufacturers ceased production of pediatric
vaccines because of liability exposure.
In response to these withdrawals from the vaccine market, Congress
enacted the NCVI Act to ensure the availability of government mandated pediatric
vaccines by addressing the liability of manufacturers for immunization-related
injuries. Among other things, the NCVI Act created a trust fund, supported by an
excise tax on each dose of vaccine sold, to compensate eligible injured parties.
Compensation awards are statutorily established and are generally limited to
actual and projected unreimbursed medical, rehabilitative and custodial
expenses, lost earnings, and pain and suffering, together with reasonable
attorneys' fees. Injured parties are not allowed to bring a lawsuit against the
manufacturer unless they have filed a claim with the program, received a final
- 21 -
<PAGE>
determination and rejected it in favor of litigation. The NCVI Act may not,
however, protect vaccine manufacturers against liability if the conditions of
the NCVI Act are not satisfied, or against suits by family members of an injured
party.
As the vaccines covered by the NCVI Act include vaccines for the
prevention of diphtheria, tetanus, pertussis, polio and HIB, the Company's DTaP,
IPV and HIB vaccines have certain protection from liability claims. While none
of the Company's other products are presently covered by the NCVI Act, from time
to time there are legislative and regulatory proposals to expand the list of
vaccines covered by, and to reduce the excise taxes that fund, the program. The
Company is unable to predict whether any other legislative or regulatory
proposal will ultimately be enacted or the effect any of these proposals may
ultimately have on the Company's business or results of future operations.
The Company has limited product liability insurance coverage. It
intends to seek additional insurance coverage as it commences commercialization
of its vaccines, but there can be no assurance that adequate additional
insurance coverage will be available at acceptable costs, if at all, or that a
product liability claim would not materially adversely affect the business or
financial condition of the Company. See "Risk Factors - Product Liability;
Limited Insurance."
EMPLOYEES
As of December 31, 1997, the Company had 260 full-time employees of
whom 31 have Ph.D. degrees and two have M.D. degrees. Of these employees, 171
were engaged in research, development and production activities, 32 were engaged
in administration, and 57 were engaged in quality/regulatory and related aspects
of the Company's operations. The Company considers its relationship with
employees to be satisfactory.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED HEREIN, THE FOLLOWING
RISK FACTORS SHOULD BE CAREFULLY CONSIDERED. THIS ANNUAL REPORT ON FORM 10-K
CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF AND MADE
PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, WHICH STATEMENTS INHERENTLY INVOLVE RISKS AND UNCERTAINTIES
THAT MAY AFFECT THE COMPANY'S BUSINESS AND PROSPECTS. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD
LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION.
DEPENDENCE UPON APPROVAL AND COMMERCIALIZATION OF DTAP VACCINE. The
Company has generated only limited revenue from the sale of its acellular
pertussis vaccine. Prior to commercial introduction, Certiva(TM) and the
Company's combination vaccines must be approved by the FDA for sales in the
United States and by similar authorities for sales in other countries. A
European formulation of Certiva(TM) and a stand-alone aP vaccine have been
approved for sale in Sweden, and a DTaP-IPV vaccine has been approved for sale
in Denmark. Certiva(TM) is currently being considered for approval for sale in
- 22 -
<PAGE>
the United States by the FDA. There can be no assurance as to when or whether
the Company will receive such approval, or that any such approval will not be
subject to additional testing requirements or other limitations that may affect
the commercialization of the product. The commercial introduction of Certiva(TM)
will require the Company to manufacture and produce large quantities of vaccine
in its manufacturing facility, which has been and continues to be modified for
increased production. The Company has limited experience in manufacturing
commercial quantities of its vaccines, including Certiva(TM), and operating its
manufacturing facilities. Accordingly, there can be no assurance that the
production process will not fail at any point or become subject to substantial
disruptions. See "Risk Factors - Manufacturing and Scale-Up." To successfully
introduce and commercialize Certiva(TM), the Company will be required to, among
other things, participate in established purchasing programs of Federal and
state governments, establish an identity and reputation for the Company and its
products, create an awareness among pediatricians of the safety and efficacy of
the vaccine, distinguish the Company's product from that of its competitors,
establish the Company as an effective and reliable supplier of vaccines, produce
sufficient quantities of vaccine and establish effective distribution channels.
The Company and Abbott have signed an agreement for Abbott to market Certiva(TM)
and certain combination vaccines in the United States to the private physician
and managed care markets upon approval by the FDA, with the Company marketing
those products to government purchasers. There can be no assurance that the
Company or Abbott will successfully implement its sales and marketing strategy.
In attempting to do so, the Company believes there will be intense competition
from other vaccine producers. There can be no assurance that the Company will
produce a commercially viable product, attain sufficient market share,
distinguish its vaccine product from that of its competitors, or achieve
profitability from the sale of Certiva(TM) or any of its other vaccine products.
See "Risk Factors Competition" and "Risk Factors - Lack of Profitability."
Currently, the Company's prospects for becoming profitable are
substantially dependent upon the successful commercialization of Certiva(TM), as
well as the successful development and commercialization of other vaccines under
development. There can be no assurance that the Company will be able to
successfully manufacture or market Certiva(TM) or any other vaccine product at
levels sufficient to generate profits. See "Risk Factors - Lack of
Profitability."
MANUFACTURING AND SCALE-UP. The production of vaccines is a highly
complex, biological process involving many steps, commencing from seed culture
through final production. The production process could fail at any point
resulting in the failure and continued inability to meet production
requirements. The Company has limited experience 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
not continue in the future or affect the Company's ability to obtain regulatory
approval for its products or the timing of such approval or affect the Company's
ability to produce vaccines. No assurances can be given that the Company will be
successful in establishing and maintaining consistent manufacture 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(TM) are located
principally in one facility. Any condition or event that adversely affects the
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.
- 23 -
<PAGE>
DEPENDENCE ON SUPPLIERS. While the Company produces the pertussis
component of Certiva(TM), it has purchased, and intends to continue to purchase,
its requirements of the diphtheria and tetanus toxoids from SSI and enhanced IPV
from SSI and another supplier. There can be no assurance that these suppliers
will be able to meet the Company's requirements, that their components will be
supplied on commercially reasonable terms, or that they will not experience
difficulties in obtaining necessary regulatory approvals or disruptions in their
production of diphtheria and tetanus toxoids or IPV.
Certain of the Company's production processes require raw materials
from sole sources or materials that are difficult for suppliers to produce and
certify to the Company's specifications. The Company also may experience
temporary or permanent shortages of critical raw materials necessary for
continued production of its vaccines. Any shortage of these materials could
delay production efforts, adversely impact production costs and yields, or
necessitate the use of substitute materials, any of which could have a
significant adverse impact on the Company's operations. In addition, the Company
has contracted with third parties for the sterile fill, labelling, and packaging
of its vaccine products until the Company obtains its own facilities to perform
these operations. Failure of any such contractor to meet the Company's
requirements could have a material adverse effect on the Company, may involve
costly delays and significant expense, and would require additional regulatory
approval as the Company seeks alternative arrangements.
CHANGES IN GOVERNMENT PURCHASING POLICIES. Children in the United
States receive immunizations from public providers, such as local health
departments, as well as from private providers. Immunizations provided by public
providers are generally paid for through federal and state government funding
under public health programs. These programs are intended to reduce barriers to
immunization and to improve immunization rates by providing free vaccine to
qualifying infants and children. Government purchases historically have been at
prices substantially below those offered to the private sector and presently
account for a substantial portion of the vaccine doses distributed in the United
States. From time to time, legislative and regulatory initiatives are proposed
that, if adopted, could significantly modify government vaccine programs by,
among other things, modifying or restricting the federal government's purchasing
authority or substantially increasing or reducing the funding available for
government vaccine purchases. The Company is unable to predict which legislative
initiative, if any, will ultimately be enacted or the effect any such initiative
may ultimately have on the Company's business or results of future operations.
In addition, proposals for health-care, insurance and tax reform may be
considered in the future by federal and state governments and some of these
proposals, if adopted, may limit government or third-party, private
reimbursement policies, or prices charged by pharmaceutical and vaccine
manufacturers for their product.
NO ASSURANCE OF EFFECTIVE MARKETING. The Company has little experience
in marketing its products. The Company is in the process of implementing its
marketing and sales plans for its products; however, there can be no assurance
that the Company's current marketing and sales strategies or the size and
make-up of the Company's sales and marketing organization will be sufficient for
the successful commercialization of its products. The factors affecting
successful commercial launch of the Company's vaccines in the United States
include, among others: establishing an identity and reputation for the Company
and its products; creating an awareness among pediatricians of the safety and
- 24 -
<PAGE>
efficacy of the Company's vaccines; distinguishing the Company's products 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. The Company has entered into supply, marketing and distribution
agreements with third parties under which such parties hold exclusive rights to
market certain of the Company's products within their respective territories.
There can be no assurance that any of these third parties will be able to
distribute and market those products successfully within its territory. There
also can be no assurance that the Company will be successful in negotiating and
executing marketing and/or distribution agreements with any other third parties
covering any products or that any other third party will be able to market the
Company's products successfully. See "Business Relationships."
UNCERTAINTIES RELATED TO CLINICAL TRIALS. Before obtaining regulatory
approval for the commercial sale of any products under development, the Company
must demonstrate through pre-clinical studies and clinical trials that these
products are safe and effective. The results from pre-clinical studies and early
clinical trials may not be predictive of results obtained in large-scale
clinical trials. There can be no assurance that large-scale clinical trials for
any of the Company's products will demonstrate safety and efficacy, be
sufficient to support application for regulatory approval, or lead to marketable
products. A number of companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials even after achieving promising
results in earlier trials.
NEED FOR REGULATORY APPROVALS. The Company has not commercialized any
products or received product approval from the FDA. The Company's vaccine
products, product development activities and manufacturing facilities and
processes are subject to extensive and rigorous regulation by the FDA, including
preclinical and clinical testing requirements, and inspection and approval
processes. Approval of the Company's products for commercial introduction in the
United States currently requires both a license for each product and a license
for each production facility. The process of obtaining licenses can be costly
and time consuming, and there can be no assurance that the licenses will be
granted, or that FDA review will not involve delays that would adversely affect
the Company's ability to market products. There also can be no assurance that
any of the products under development by the Company will demonstrate the safety
or efficacy profiles necessary for regulatory approval, or that the Company's
products under development or its production facility will receive the requisite
regulatory approvals and licenses in a timely fashion or at all. There also can
be no assurance that the FDA or other regulatory authorities will not require
the Company to conduct additional testing to assess the safety and/or efficacy
of the Company's vaccines, including Certiva(TM). Even if the necessary licenses
are obtained from the FDA, there may be limitations imposed that affect the
commercialization of the product, including limitations on product use, and the
FDA can withdraw approvals at any time upon compliance with appropriate
regulatory procedures. The FDA can also limit or prevent the manufacture or
distribution of the Company's products both in the United States and abroad and
can require recalls of products. The FDA regulations depend heavily on
administrative and scientific interpretation and advisory committee
determinations, and there can be no assurance that future interpretations by the
FDA or other regulatory bodies, with possible prospective and retroactive
effect, will not adversely affect the Company. In addition, the FDA and various
state agencies inspect the Company and its facilities from time to time to
determine whether the Company is in compliance with regulations, including
manufacturing, testing, recordkeeping, quality control and labelling practices.
A determination that the Company is in material violation of such regulations
could have a material adverse effect on the Company, including, without
limitation, product recalls, suspensions or withdrawals of licenses, revocation
or suspension of export authorizations, and denials of any pending applications.
PATENT PROTECTION AND PROPRIETARY INFORMATION. The vaccine industry
traditionally has placed considerable importance on obtaining and maintaining
- 25 -
<PAGE>
patent and trade secret protection for significant new technologies, products
and processes. The Company believes that such protection will be an important
factor in its success and may require the expenditure of substantial resources.
Many companies, universities and research institutions have applied for and/or
obtained patents for vaccine products and technologies that may be competitive
or inconsistent with those held by or licensed to the Company. No assurances can
be given as to the degree and range of protection any patents will afford the
Company, that additional patents will be issued to the Company, or as to the
extent to which the Company will be successful in avoiding any patents granted
to others. Further, there can be no assurance that others have not or will not
independently develop or otherwise properly gain access to technology or
information that is substantially similar to that which is unpatented yet
considered proprietary by the Company. The Company also may desire or be
required to obtain licenses from others in order to develop, produce and market
commercially viable products effectively. Failure to obtain those licenses could
have a significant adverse effect on the Company's ability to commercialize its
vaccine products. There can be no assurance that such licenses will be
obtainable on commercially reasonable terms, if at all, that the patents
underlying such licenses will be valid and enforceable or that the proprietary
nature of the unpatented technology underlying such licenses will remain
proprietary. There has been, and the Company believes that there may be in the
future, significant litigation in the industry regarding patent and other
intellectual property rights. If the Company becomes involved in such
litigation, it could consume substantial resources.
COMPETITION AND TECHNOLOGICAL CHANGE. Competition in the vaccine
industry is intense. Competitors of the Company both in the United States and
internationally include major pharmaceutical and chemical companies, specialized
biotechnology firms, universities and other research institutions. Many of these
competitors are actively developing competing vaccines. For example, during the
past two years, three competitors announced that their respective DTaP vaccines
were approved by the FDA for use in infants and children. One of those
competitors also announced that the FDA licensed a vaccine that combines by
reconstitution that company's HIB vaccine with its DTaP vaccine for
administration at 15-18 months of age and that it continues to seek FDA approval
for administration at two, four and six months of age. In addition, several
competitors' DTaP vaccines and certain combination vaccines have been licensed
for sale outside of the United States. Many of these competitors have
substantially greater resources, more extensive experience in conducting
clinical testing and obtaining regulatory approvals for their products, greater
operating experience, larger research and development and marketing staffs, and
greater production capabilities than those of the Company. In addition, the
vaccine industry is subject to significant technological change. There can be no
assurance that the Company's competitors will not succeed in designing around
the Company's patents, developing technologies and products that are as or more
effective than any that have been or are being developed by the Company, or
developing technologies and products that would render the Company's technology
and products obsolete and noncompetitive.
PRODUCT LIABILITY; LIMITED INSURANCE. The testing and marketing of
vaccine products entail an inherent risk of product liability. Although the
Company has limited product liability insurance coverage, it intends to seek
additional insurance coverage as it commences commercialization of its products.
There can be no assurance that adequate additional insurance coverage will be
available at acceptable cost, if at all, or that a product liability claim would
not materially adversely affect the business or financial condition of the
Company. To the extent the Company is not covered by insurance, the Company
faces potential liability that could be substantial in the event of claims.
LACK OF PROFITABILITY. The Company's accumulated deficit as of December
31, 1997 was approximately $102.6 million, and the Company presently has limited
- 26 -
<PAGE>
revenues. The Company expects to incur additional losses until such time as the
Company makes significant commercial sales of one or more of its vaccine
products. The Company's ability to achieve and maintain profitability is
dependent upon its ability to develop products that are effective and
commercially viable, to continue to obtain regulatory approvals for production
and sale of its products, and to produce and market its products successfully
and in sufficient quantities. There can be no assurance that the Company will
become profitable. See "Risk Factors - Dependence Upon Approval and
Commercialization of DTaP Vaccine."
AVAILABILITY OF CAPITAL. It is anticipated that the Company will
continue to expend significant amounts of capital to fund its operations and
capital expenditures. The Company plans to finance its cash requirements through
a combination of: cash and cash equivalents; revenues from product sales and
from license, collaboration, marketing, distribution and/or development
agreements; the exercise of stock options; the sale of debt and/or equity
securities; mortgage financing; lines of credit; and equipment leases. There can
be no assurance that the Company will be able to satisfy its funding
requirements from any of these alternatives or that it will be effective in
reducing cash requirements for operations if FDA approval is not timely
received. See Item 6 - Selected Financial Data, and Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operation.
DEPENDENCE ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL. The
Company's success in developing marketable products and achieving a competitive
position will depend, in part, on its ability to attract and retain qualified
personnel. Competition for such personnel is intense, and no assurance can be
given that the Company will be able to continue to attract or retain such
personnel. The loss of key personnel could adversely affect the Company.
DIVIDENDS AND TAXATION. The Company has never paid cash dividends on
its Common Stock. The Company currently intends to retain earnings, if any, to
finance the growth and development of its business and does not anticipate
paying cash dividends in the foreseeable future. Moreover, any profits earned by
the U.S. subsidiary of the Company will not be distributable directly to the
Company's shareholders. Instead, such subsidiary must declare and pay a dividend
to the Company, and the Company in turn must declare a dividend to its
shareholders. This will subject each dividend to a withholding tax. See Item 5 -
Market for Registrant's Common Equity and Related Stockholder Matters, and Item
7 Management's Discussion and Analysis of Financial Condition and Results of
Operation.
IMPACT OF BECOMING A PASSIVE FOREIGN INVESTMENT COMPANY. If more than a
certain percentage of the Company's assets or income become 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. See Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters, and Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation.
VOTING CONTROL BY PRINCIPAL SHAREHOLDERS. The principal shareholders of
the Company, BioChem and Dr. Phillip Frost, either directly or through
affiliates, are parties to a Shareholders' Agreement requiring, among other
things, that the Company's Common Stock covered by the agreement be voted
together for the election of directors. As of February 27, 1998, these principal
shareholders beneficially owned approximately 19,062,202 shares of the Company's
outstanding Common Stock, which represented approximately 52.7% of the Company's
then outstanding Common Stock. See Item 13 - Certain Relationships and Related
Transactions.
- 27 -
<PAGE>
VOLATILITY OF STOCK PRICE. The market prices for securities of many
biotechnology and pharmaceutical companies, including the Company, have been
highly volatile. Many factors have historically had, and are expected to
continue to have, a significant impact on the Company's business and on the
market price of the Company's securities including: announcements by the Company
and others regarding the results of regulatory approval filings, clinical trials
or other testing; technological innovations or new commercial products by the
Company or its competitors; government regulations; developments concerning
proprietary rights; public concern as to safety of vaccine and pharmaceutical
products; and economic or other external factors.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Company's Common Stock in the public market following the exercise of options or
the conversion of convertible securities could have an adverse effect on the
price of the Company's securities. To the extent that either of the two
principal shareholder groups determines to sell a substantial number of their
shares of the Company's Common Stock, such sales could significantly increase
the volatility of the market price of the issued and outstanding securities of
the Company. In addition, one of the principal shareholders holds certain
registration rights concerning shares of the Company's Common Stock that it
owns. See Item 13 - Certain Relationships and Related Transactions.
- 28 -
<PAGE>
ITEM 2. PROPERTIES
The production of vaccines is a highly complex, biological process
involving many steps, commencing from seed culture through final production. The
Company's vaccine production processes involve the use of patented technologies
and proprietary rights and trade secrets at the Company's facilities. The
Company's facilities are briefly described below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SQUARE
FACILITY/FUNCTION LOCATION FEET OWN/LEASE
Production Facility Beltsville, MD 26,000 Leased until February 1999
(ten-year renewal option)
Production Facility Beltsville, MD 35,000 Leased until February 2001
(two five-year renewal options)
Warehouse and Support Services Beltsville, MD 31,000 Owned
for Production Facility
Research and Development Beltsville, MD 27,700 Subleased until April 1998
Laboratory Facility (contingent renewal option)
Executive Offices and Beltsville, MD 25,600 Leased until December 2000
Warehouse Facility (remaining three-year renewal option)
</TABLE>
The Company's production facilities have been designed and built to
produce vaccines for large scale clinical trials and commercial sales after
product licensing. The Company has modified and continues to modify its 26,000
square foot production facility to expand production capacity for Certiva(TM).
See Item 1 - Business, "Risk Factors - Manufacturing and Scale-Up."
In 1996, the Company acquired a 35,000 square foot production facility
in Beltsville, Maryland. The acquisition included the purchase and lease of
equipment and leasehold improvements and the assumption of real estate leases
underlying the facility, which are scheduled to expire in 2001, subject to two
five-year extensions. The facility is being dedicated to the production of
vaccines for clinical trials and commercial sale.
The Company owns a building located adjacent to its current production
facility. This building has been modified to house the service and warehouse
departments that support the Company's production facility.
The Company is presently subleasing space for a research and
development laboratory facility. This facility, consisting of approximately
27,700 square feet, is used for research in areas such as protein chemistry,
immunology, molecular biology and conjugation technology.
- 29 -
<PAGE>
The Company reached a preliminary understanding with a real estate
investment trust to lease an approximately 75,500 square foot facility for a
period of ten years, with two five-year renewal options. The initial base annual
rent under the lease would be 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 would have an option to purchase the facility during specified periods
of the lease term. The trust would provide the Company with an allowance of
approximately $1.4 million for tenant improvements, and would make available to
the Company a line of credit of up to approximately $1.8 million to fund any
additional improvements 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 trust. The
negotiations on these agreements are substantially completed and these
agreements may be executed in the near future. There can be no assurances that
the Company will be able to negotiate successfully and sign the terms of a
definitive lease for the facility or the line of credit, or that, if these
documents are executed, the financial terms thereof would not be materially
different. If the Company secures this facility, it intends to consolidate its
general, administrative, research and development groups in this facility and to
reduce its existing leased space for those functions. See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation.
ITEM 3. LEGAL PROCEEDINGS
The Company is, and from time to time becomes, involved in claims and
lawsuits that are incidental to its business. In the opinion of the Company's
management, there are no other material legal proceedings pending against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 30 -
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on the American Stock Exchange
("AMEX") under the symbol "NVX." The table below sets forth the high and low
closing sales prices as reported on the AMEX composite tape for each calendar
quarter of 1996 and 1997.
HIGH LOW
1996
First Quarter $16 1/8 $12 1/2
Second Quarter 25 3/4 12 1/8
Third Quarter 28 14 5/8
Fourth Quarter 28 17 3/8
1997
First Quarter $27 1/2 $19 3/4
Second Quarter 21 17 1/2
Third Quarter 25 1/2 18 5/8
Fourth Quarter 29 3/4 22 7/16
The number of record holders of the Company's Common Stock as of
February 27, 1998 was approximately 246. The transfer agent and registrar for
the Common Stock is American Stock Transfer and Trust Company, which is located
at 40 Wall Street, New York, New York 10005.
The Company has never paid cash dividends on its Common Stock and
anticipates that its earnings, if any, will be retained for development of the
Company's business. Therefore, it is not anticipated that any cash dividends on
its Common Stock will be declared in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company, general business
conditions and tax considerations.
Because the Company is a Canadian corporation, any profits earned by
its U.S. subsidiary will not be distributable directly to shareholders. Instead,
for those profits to be distributed to shareholders, the subsidiary must declare
a dividend to the Company, and the Company in turn must declare a dividend to
its shareholders. This will subject each dividend to a withholding tax. First,
the dividend from the subsidiary to the Company will be subject to a 5%
withholding tax imposed by the United States on the gross amount of the
dividend. Pursuant to the Canada-United States Income Tax Convention (1980) (the
"Treaty"), the subsequent dividend paid by the Company to a shareholder resident
in the United States will be subject to Canadian withholding tax at the rate of
15% on the gross amount of the dividend. The rate of withholding tax will be
reduced to 5% in respect of dividends paid to a company that is a resident of
the United States for purposes of the Treaty and owns at least 10% of the voting
stock of the Company. Each shareholder should consult his or her own tax advisor
as to tax consequences associated with dividends received on the Company's
Common Stock.
If more than a certain percentage of the Company's assets or income is
passive, the Company will be classified for United States tax purposes as a
- 31 -
<PAGE>
passive foreign investment company or PFIC, and a United States taxpayer may be
subject to an additional federal income tax on receiving certain dividends from
the Company or selling Common Stock. Certain interest, dividend, capital gain
and royalty income may be considered passive income for PFIC purposes, which, in
the absence of sufficient other income, would result in the Company being
classified as a PFIC.
If the Company becomes a PFIC, a United States taxpayer will be subject
to special rules with respect to transactions involving the Common Stock. Under
these rules, all gains realized on disposition of the United States taxpayer's
Common Stock will be allocated pro rata over the number of years in which the
shareholder held the Common Stock. The gain that is allocated to a prior year
(subsequent to December 31, 1986) in which the Company was a PFIC, or any
subsequent year other than the year of disposition, will be taxed at the highest
marginal rate for that year and such tax will be subject to an interest charge
as if it had originally been due in that year. In addition, gain realized on the
disposition of the United States taxpayer's Common Stock that is allocated to
the current year or to a prior year before the Company was a PFIC will be
treated as ordinary income. Similar rules will apply to distributions made by
the Company. The above rules will not apply if the United States taxpayer elects
to treat the Company as a qualified electing fund and the Company agrees to
provide certain information to the United States Internal Revenue Service. In
such case, the United States taxpayer will include in his or her income each
year his or her pro rata share of the ordinary income and capital gains of the
Company. The Company has not been classified as a PFIC to date, and during 1998,
the Company intends to, and believes that it can, generate sufficient other
income to avoid being classified as a PFIC. See Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operation.
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for the Company are set forth
below. The selected financial data as of December 31, 1997 and 1996, and for the
years ended December 31, 1997, 1996 and 1995 have been derived from, and are
qualified by reference to, the audited financial statements included elsewhere
in this Annual Report. The selected financial data as of December 31, 1995, 1994
and 1993 and for the years ended December 31, 1994 and 1993 have been derived
from the audited financial statements of the Company not included in this Annual
Report. The selected consolidated financial data should be read in conjunction
with the financial statements of the Company and other financial information
included in this Annual Report.
- 32 -
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
NORTH AMERICAN VACCINE, INC.
Fiscal Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Marketing, research and development
agreements $ 8,001 $ 9,656 $ 3,000 $ -- $ --
Contract revenue -- -- -- -- 141
Product sales 1,699 892 -- -- --
--------- --------- --------- --------- ---------
Total revenues 9,700 10,548 3,000 -- 141
--------- --------- --------- --------- ---------
Operating Expenses:
Production 18,662 14,764 6,317 6,188 3,032
Research and development 19,860 11,594 10,206 5,763 5,824
General and administrative 11,386 6,753 6,696 4,543 4,070
--------- --------- --------- --------- ---------
Total operating expenses 49,908 33,111 23,219 16,494 12,926
--------- --------- --------- --------- ---------
Operating loss (40,208) (22,563) (20,219) (16,494) (12,785)
Gain on sale of investments in affiliates -- 4,228 14,429 11,929 --
Interest and dividend income 3,140 2,934 804 638 657
Interest expense (6,772) (4,088) -- -- --
--------- --------- --------- --------- ---------
Net loss $ (43,840) $ (19,489) $ (4,986) $ (3,927) $ (12,128)
========= ========= ========= ========= =========
Basic and diluted net loss per share $ (1.39) $ (0.63) $ (0.17) $ (0.14) $ (0.44)
========= ========= ========= ========= =========
Weighted-average number of common
shares outstanding 31,641 30,764 29,745 28,785 27,622
BALANCE SHEET DATA:
Cash and cash equivalents $ 45,502 $ 70,881 $ 10,443 $ 20,922 $ 17,166
Investments in affiliates 843 1,281 9,065 17,724 38,039
Total assets 84,508 122,962 41,249 49,580 63,762
Convertible subordinated notes 83,734 86,250 -- -- --
Long-term portion of capital lease 4,110 5,871 -- -- --
Preferred stock 6,538 6,538 6,538 6,538 6,538
Common stock 78,509 71,357 58,474 56,922 51,958
Unrealized investment holding gains 215 653 7,466 14,762 33,165
Accumulated deficit (102,609) (58,769) (39,280) (34,294) (30,367)
Dividends -- -- -- -- --
</TABLE>
- 33 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
THE FOLLOWING PARAGRAPHS IN THIS FORM 10-K 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 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 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").
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 market for 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
manufacturing, formulation, 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.
- 34 -
<PAGE>
In 1995, 1996 and 1997, the Company has recognized development revenues
pursuant to agreements with Pasteur Merieux-Connaught, under which the Company
and Pasteur Merieux-Connaught will jointly develop the Company's Group B
meningococcal 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 FDA. The marketing agreement also
will allow Abbott to market the Company's DTaP-HIB (incorporating one of its
Haemophilus influenzae type b vaccines), 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 is providing the Company with clinical
development funding. In addition, the Company will receive payments upon
achievement of prescribed milestones. 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. Under the agreement with Abbott,
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 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 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 with the
SEC, which has been declared effective, registering resales of the notes and the
underlying shares of 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 December 31, 1997, 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
- 35 -
<PAGE>
tangible net worth (defined to include amounts under the outstanding convertible
subordinated notes) and certain other financial ratios.
Research and development expenses were $19.9 million, $11.6 million,
and $10.2 million in 1997, 1996, and 1995, respectively. The Company had 268,
206, and 167 full-time employees as of December 31, 1997, 1996, and 1995,
respectively.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
In 1997, the Company recognized $1.7 million in revenue from product
sales to SSI, compared to $892,000 in 1996. In addition, the Company recognized
in 1997 $8.0 million under collaborative agreements, compared to $9.7 million in
1996. Revenue in 1997 from collaboration agreements consists of a $6 million
milestone payment from Pasteur Merieux-Connaught under the license and
development agreements covering the Company's Group B meningococcal vaccine,
with the balance representing revenue attributable to development funding under
the Company's agreement with Abbott. Revenue from collaborative agreements in
1996 were principally with Abbott and Pasteur Merieux-Connaught.
Production expenses were $18.7 million in 1997 compared to $14.8
million in 1996. The increase in these expenses in 1997 is due to increases in
materials, labor, and facilities operating costs as the Company produces its
acellular pertussis vaccine for European distribution and 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.
Production costs attributable to the Company's products, including Certiva(TM),
are expensed until regulatory approval is obtained for such product.
Research and development expenses increased to $19.9 million in 1997
from $11.6 million in 1996. The increase is attributable primarily to higher
depreciation and operating costs for development work in 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, and costs to prepare and file product
license applications. These increases were offset in part by lower clinical
testing and related expenses.
General and administrative expenses were $11.4 million in 1997 as
compared to $6.8 million in 1996. Approximately $2.0 million of this increase is
due to the combined effect of 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 one-time technology license fee
payment. The remaining increase is attributable to higher labor costs as a
result of an increase in salaries and the number of employees, as well as
professional service costs.
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 and dividend income increased to $3.1 million in 1997 from
$2.9 in 1996. This increase is due primarily to higher average cash balances as
a result of the placement of $86.25 million convertible subordinated notes in
May 1996. See "Liquidity and Capital Resources," below.
- 36 -
<PAGE>
Interest expense increased to $6.8 million in 1997 from $4.1 million in
1996 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 $43.8 million or
$1.39 per share in 1997 as compared to a net loss of $19.5 million or $0.63 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
$42.5 million or $1.34 per share. Without the $4.2 million gain on the sale of
investment securities in 1996, the net loss per share for 1996 would have been
$0.77. The weighted-average number of common shares outstanding was 31.6 million
for 1997 compared to 30.8 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, the sale of 350,000 shares of the
Company's Common Stock to Abbott in the fourth quarter of 1996, and the
conversion of a portion of the outstanding convertible subordinated notes as
described above.
YEARS ENDED DECEMBER 31, 1996 AND 1995
In 1996, the Company recognized $892,000 of revenue from product sales
of its acellular pertussis vaccine. All such product sales were for export. In
addition, the Company recognized $9.7 million of revenue from its collaboration
agreements principally with Pasteur Merieux-Connaught and Abbott.
Production expenses were $14.8 million in 1996 compared to $6.3 million
in 1995. The increase in these expenses in 1996 is due to increases in
depreciation, materials, and labor, as the Company produces the acellular
pertussis vaccine for European distribution and prepares for regulatory approval
of Certiva(TM) in the United States. The increase in labor cost is attributable
primarily to an increase in number of employees. In addition, facility costs
increased in 1996 over 1995 due to the Company's placing in service its expanded
production facility and its adjacent support facility.
Research and development expenses increased to $11.6 million in 1996
from $10.2 million in 1995. The increase in these expenses in 1996 is due
primarily to depreciation expenses related to the acquisition of a new
manufacturing facility, and to a lesser extent, an increase in clinical testing
and related expenses as the number of clinical trials sponsored by the Company
increased and as the Company expanded its clinical and regulatory affairs
operations. See "Liquidity and Capital Resources" below for a description of
acquisition of the new facility.
General and administrative expenses were $6.8 million in 1996 as
compared to $6.7 million in 1995. The increase is primarily due to a greater
number of employees and related use of supplies, offset in part by decreased
outside consulting expenses.
In 1996, the Company sold 193,084 shares of its investment in the
common stock of IVAX, which generated proceeds of approximately $5.2 million and
a realized gain of $4.2 million. In 1995, the Company sold the remaining 695,936
shares of its investment in common stock of BioChem Pharma, Inc. and 156,916
shares of its investment in IVAX common stock, which generated approximately
$11.5 and $4.3 million of cash, respectively. The realized gain on these sales
were $10.9 and $3.5 million, respectively.
- 37 -
<PAGE>
Interest and dividend income increased to $2.9 million in 1996 from
$804,000 in 1995. 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.
Interest expense in 1996 was $4.1 million due to the issuance of the
convertible subordinated notes, and the capital lease obligations for certain
equipment in the newly acquired manufacturing facility.
The factors cited above resulted in a net loss of $19.5 million or
$0.63 per share of the Company's common stock in 1996 as compared to net loss of
$5.0 million or $0.17 per share of the Company's common stock in 1995. Without
the gains on the sales of investment securities in 1996 and 1995, the net losses
per share for 1996 and 1995 would have been $0.77 and $0.65 per share of the
Company's common stock, respectively. The weighted average number of common and
common equivalent shares outstanding was 30.8 million for 1996 compared to 29.7
million for 1995. The increase in the number of weighted average shares
outstanding for 1996 as compared to 1995 was attributable primarily to the
exercises of stock options and the sale of 350,000 shares of the Company's
common stock to Abbott.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirement for operations was $10.5 million in the
fourth quarter of 1997 and $37.9 million for the year ended December 31, 1997.
The Company's cash requirement for operations is defined as 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. At December 31,
1997, the Company had cash and cash equivalents of $45.5 million and investment
securities in an affiliate with a market value of $843,000. The investment
consisted of 125,000 shares of IVAX common stock. The fair market value as of
March 17, 1998 was approximately $1.2 million. This investment is volatile and
therefore subject to significant fluctuations in value.
The Company anticipates that cash requirements for operations in the
first quarter of 1998 could be between approximately $10.5 and $11.5 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; and conducts clinical trials. Quarterly cash
requirements for operations beyond these periods will depend principally upon
the level and efficiency of vaccine production, the timing of FDA approval for
Certiva(TM), level of sales of Certiva(TM) in the U.S., level of product sales
in Europe as additional approvals are obtained, costs to market Certiva(TM)
following 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 notes described above. If the Company does not secure
FDA licensure and generate commercial sales of Certiva(TM), the Company will
need to address its future cash requirements for operations. This issue may be
addressed through reductions in operating levels and through the sale of debt or
equity securities, among other means as more fully described below. 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 meet the projections for cash requirements for
operations, 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.
- 38 -
<PAGE>
Total capital expenditures for 1997 were $2.1 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 $4 million to $8 million,
depending upon the ultimate extent of the expansions, which has not yet been
determined. The foregoing is a forward looking statement, and 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 for
further regulatory approvals of existing products; the anticipated timing for
regulatory approval of 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.
The capital expenditures described above are exclusive of any future
real estate acquisition or build-out plans. The Company continues to evaluate
its need to build-out, lease or acquire additional research, development, and
other facilities to accommodate the Company's expanding vaccine development
program. The Company reached a preliminary understanding with a real estate
investment trust to lease an approximately 75,500 square foot facility for a
period of ten years, with two five-year renewal options. The initial base annual
rent under the lease would be 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 would have an option to purchase the facility during specified periods
of the lease term. The trust would provide the Company with an allowance of
approximately $1.4 million for tenant improvements, and would make available to
the Company a line of credit of up to approximately $1.8 million to fund any
additional improvements 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 trust. The
negotiation of these agreements is substantially completed and these agreements
may be executed in the near future. There can be no assurances that the Company
will be able to negotiate successfully and sign a definitive lease for the
facility or the attendant line of credit, or that if these documents are
executed, the financial terms thereof will not be materially different. 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 capital expenditures of approximately
$1.0-$2.0 million would be required to modify the facility to accommodate the
Company's operations. 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.
As noted above, the Company is obligated to maintain compliance with
certain financial covenants under an equipment lease agreement entered into in
connection with the 1996 acquisition of a 35,000 square foot manufacturing
facility. These financial covenants include maintaining minimum cash and
investment balances, minimum tangible net worth, and compliance with prescribed
financial ratios. The Company may at any time, and intends during the first or
second quarter of 1998 to, eliminate these financial covenants by posting a
letter of credit for a predetermined amount. The amount of the letter of credit
would be approximately $5.9 million as of March 31, 1998 and would be secured by
a cash deposit of an equal amount. In the absence of posting this letter of
credit, a breach of the financial covenants would result in the Company being
obligated to post such letter of credit.
- 39 -
<PAGE>
Cash requirements for operations and capital expenditures for 1998 are
expected to be financed through a combination of: cash and cash equivalents;
fees and payments from existing and/or new license, marketing, distribution
and/or development agreements; the exercise of stock options; the sale of debt
and/or equity securities; mortgage financing; lines of credit; and equipment
leases. The Company currently has no agreements or understandings regarding any
of the debt or equity financing options. The Company believes that it has
adequate cash resources to meet its 1998 funding requirements although there are
no assurances in this regard. Failure or significant delays in receiving
additional regulatory approvals and satisfying 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 would reduce cash
requirements for operations through significant reductions in operating levels,
although there are no assurances that the Company would be successful 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 timing of FDA approval for
Certiva(TM); 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 product sales; the magnitude and timing of any fees and
payments from license, marketing, distribution and/or development agreements;
the magnitude of fixed costs; and the capital expenditures required to operate
and expand existing and future facilities.
OUTLOOK
The Company recognized an operating loss of $43.8 million in 1997 based
on revenues of $1.7 million from product sales, $6.0 million from collaborative
milestone and license payments, and $2.0 million under a development agreement.
The Company expects to incur an operating loss of between $12.5 and $13.5
million in the first quarter of 1998, which is approximately equal to the
operating loss incurred in the last quarter of 1997. Thereafter, the Company
anticipates that the quarterly 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 marketing clearance
for Certiva(TM); the timing for 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 the Company's
production operations; 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 backlog of
orders believed to be firm for the Company's acellular pertussis vaccine was
approximately $1 million as of December 31, 1997. The Company does not consider
orders for any of the Company's products to be firm until such time as
regulatory approval is obtained for each such product. To date, the Company has
manufactured Certiva(TM) in anticipation of FDA approval and has expensed all
related production expenses. There are no assurances that the FDA will allow or
permit the Company to sell all or any portion of the vaccine produced and
failure to receive permission to sell a significant portion of the product could
have a material adverse affect on the future results of operations of the
Company. The foregoing are forward looking statements and the factors affecting
its outcome are described elsewhere in this Management's Discussion and Analysis
of Financial Condition and Results of Operation, including the first paragraph
hereof, and in the risk factors and other information contained in this Form
10-K and other filings with the SEC, to which the reader's attention is
directed.
- 40 -
<PAGE>
The quarterly operating results may also 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, to scale up
production 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 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
regulatory approval for its products or the timing of such approval. 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(TM) 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, 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 1998 to European distributors for sale and distribution in select
European countries. As of December 31, 1997, the Company's backlog of orders
believed to be firm are approximately $1.0 million. 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 Company's European distributors will launch the products in a
timely manner or at all, or that if launched, that the distributors will be
effective in the marketing and distributing the products. The Company does not
control the marketing and distribution efforts of such distributors in their
respective territories and, therefore, the Company's revenues for product sales
in those territories are dependent upon the timing, implementation, and
effectiveness of these parties' sales, marketing and distribution efforts.
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.
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. In January
1998, the Company was advised by the FDA that Certiva(TM) is on track for
completing the final steps for licensure. The
- 41 -
<PAGE>
Company has prepared and submitted additional information to the FDA in
furtherance of its license application. Following FDA approval, the Company,
therefore, anticipates revenues during the second or third quarter of 1998 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, revenues from operations and the prospects for profitability would
increase. The foregoing are forward looking statements, and there are no
assurances that the Company will achieve profitability based solely on revenues
from its acellular pertussis vaccine or any future vaccines under development.
There can be no assurance that the FDA's approval will be obtained or that, once
obtained, product revenues will be generated in the time frame projected, or
that 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 adequacy of the most recent information submitted,
the timeliness of the FDA completing its entire review process, the sufficiency
of the clinical trials' design, the quality of the clinical data submitted to
the FDA, and the adequacy of the systems, procedures, operations and facilities
relating to 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; establishing efficient and consistent production of sufficient
quantities of vaccine 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 risk factors and other information
contained in this Form 10-K, 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 its
new conjugate vaccine against Group B meningococcal infection for both adults
and pediatric indications. In 1996, the Company recognized revenue from Pasteur
Merieux-Connaught under these agreements, and in the third quarter of 1997, the
Company received a $6 million milestone payment 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 $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. Total remaining
payments by Abbott to the Company under the agreement amount to $26 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.
- 42 -
<PAGE>
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 $5
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 1997, the Company recognized $8.0 million of
revenue under marketing, research and development agreements, which includes the
$6 million received under the agreements with Pasteur Merieux-Connaught. 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(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 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(TM) 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
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
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. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share. Basic loss per share includes no dilution
- 43 -
<PAGE>
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
December 31, 1997, 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 Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements become effective for the Company's 1998 financial
statements. The Company is evaluating these statements to determine the impact
on its reporting and disclosure requirements.
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. The Company intends to test the system for Year 2000 compliance.
The Company also uses various "off the shelf" software applications throughout
the Company for the storage and analysis of various types of data that
management is dependent upon for day to day operations. Management's preliminary
assessment is that little or no modifications or replacement will be necessary
to the Company's existing software to achieve Year 2000 qualification.
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 does not
anticipate that the suppliers cost to obtain Year 2000 compliance will be passed
on to the Company. However, there are no assurances that the systems of other
companies on which the Company's systems rely will be timely converted. In
addition, there are no assurances that the failure by such other companies'
systems to comply, or compliance in a manner that is not 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 interim
internal assessment, the Company does not anticipate that expenditures
specifically related to software modifications for year 2000 compatibility will
have a material adverse affect on future results from operations or financial
condition, although there are no assurances in this regard.
- 44 -
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and accompanying Notes thereto, the
Accountants' Report, required Supplementary Data, and certain other financial
information are set forth on pages 46 to 67 of this Annual Report immediately
following. The table of contents to the Financial Statements and accompanying
Notes appears on page 69 of this Annual Report.
- 45 -
<PAGE>
Report of Independent Public Accountants
To North American Vaccine, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of North American
Vaccine, Inc. (a Canadian corporation) and Subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurances about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of North American Vaccine, Inc.
and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
------------------------
Arthur Anderson LLP
Washington, D.C.
February 6, 1998
- 46 -
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, December 31,
1997 1996
------------------- -----------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 45,502 $ 70,881
Accounts receivable 324 4,166
Inventory 2,730 1,782
Prepaid expenses and other current assets 615 533
------------------- -----------------
Total current assets 49,171 77,362
Property, plant and equipment, net 31,428 40,629
Investment in affiliate, at market 843 1,281
Deferred financing costs, net 2,603 3,184
Other assets 463 506
------------------- -----------------
Total assets $ 84,508 $ 122,962
=================== =================
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
- ----------------------------------------------
Current liabilities:
Accounts payable $ 3,343 $ 1,912
Deferred revenue 3,999 3,000
Obligation under capital lease, current portion 1,593 1,496
Other current liabilities 5,064 4,540
------------------- -----------------
Total current liabilities 13,999 10,948
6.50% Convertible subordinated notes, due May 1, 2003 83,734 86,250
Obligation under capital lease, net of current portion 4,110 5,871
Deferred rent credit, net of current portion 12 114
------------------- -----------------
Total liabilities 101,855 103,183
COMMITMENTS AND CONTINGENCIES
Shareholders' (deficit) 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
31,936,539 shares at December 31, 1997 and 31,406,999 shares at
December 31, 1996 78,509 71,357
Unrealized investment holding gain 215 653
Accumulated deficit (102,609) (58,769)
------------------- -----------------
Total shareholders' (deficit) equity (17,347) 19,779
------------------- -----------------
Total liabilities and shareholders' (deficit) equity $84,508 $122,962
=================== =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- 47 -
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended December 31,
1997 1996 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Marketing, research and development agreements $ 8,001 $ 9,656 $ 3,000
Product sales 1,699 892 -
---------------- --------------- ---------------
Total revenues 9,700 10,548 3,000
---------------- --------------- ---------------
Operating expenses:
Production 18,662 14,764 6,317
Research and development 19,860 11,594 10,206
General and administrative 11,386 6,753 6,696
---------------- --------------- ---------------
Total operating expenses 49,908 33,111 23,219
---------------- --------------- ---------------
Operating loss (40,208) (22,563) (20,219)
Other income (expenses):
Gain on sale of investment in affiliate - 4,228 14,429
Interest and dividend income 3,140 2,934 804
Interest expense (6,772) (4,088) -
---------------- --------------- ---------------
Net loss $ (43,840) $ (19,489) $ (4,986)
================ =============== ===============
Basic and diluted net loss per share $ (1.39) $ (0.63) $ (0.17)
Weighted-average number of common shares
outstanding 31,641 30,764 29,745
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- 48 -
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
(In thousands)
Series A Unrealized Total
Convertible Invest- Share-
Preferred Stock Common Stock ment Accum- holders'
--------------------------- ------------------------- Holding ulated Equity
Shares Amount Shares Amount Gains Deficit (Deficit)
------------- ------------ ---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 2,000 $ 6,538 29,253 $56,922 $14,762 $ (34,294) $43,928
Exercises of stock options - - 920 1,424 - - 1,424
Shares issued under
401(k) plan - - 14 128 - - 128
Realized investment holding gain - - - - (14,429) - (14,429)
Increase in market value
of investment - - - - 7,133 - 7,133
Net loss - - - - - (4,986) (4,986)
------------- ------------ ---------- ------------- ------------ ------------ ------------
Balance, December 31, 1995 2,000 $ 6,538 30,187 $58,474 7,466 $ (39,280) $33,198
Exercises of stock options - - 859 6,356 - - 6,356
Issuance of common stock - - 350 6,344 - - 6,344
Shares issued under
401(k) plan - - 11 183 - - 183
Realized investment holding gain - - - - (4,228) - (4,228)
Decrease in market value
of investment - - - - (2,585) - (2,585)
Net loss - - - - - (19,489) (19,489)
------------- ------------ ---------- ------------- ------------- ----------- ------------
Balance, December 31, 1996 2,000 $ 6,538 31,407 $71,357 $ 653 $ (58,769) $19,779
Exercises of stock options - - 498 5,036 - - 5,036
Retirement of stock used to exercise
options - - (80) (1,890) - - (1,890)
Shares issued under
401(k) plan - - 11 238 - - 238
Stock option compensation - - - 1,313 - - 1,313
Conversion of subordinated convertible
notes into common stock - - 101 2,455 - - 2,455
Decrease in market value
of investment - - - - (438) - (438)
Net loss - - - - - (43,840) (43,840)
------------- ------------ ---------- ------------- ------------- ----------- ------------
Balance, December 31, 1997 2,000 $ 6,538 31,937 $78,509 $ 215 $(102,609) $(17,347)
============= ============ ========== ============= ============= =========== ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- 49 -
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
1997 1996 1995
------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (43,840) $ (19,489) $ (4,986)
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of investment in affiliate - (4,228) (14,429)
Loss (gain) on disposal of equipment 131 (12) 27
Depreciation and amortization 11,017 6,154 2,223
Amortization and reduction of deferred financing costs 520 335 -
Contribution of common stock to 401(k) plan 238 183 128
Stock option compensation 1,313 - -
Decrease (increase) in other assets 43 47 (248)
Decrease in deferred rent (91) (81) (75)
Cash flows provided by (used in) other working capital items 5,756 (1,818) (56)
------------------ ----------------- -----------------
Net cash used in operating activities (24,913) (18,909) (17,416)
------------------ ----------------- -----------------
Cash flows from investing activities:
Capital expenditures (2,132) (21,012) (10,279)
Proceeds from sale of investment in affiliate - 5,199 15,792
Proceeds from sale of equipment 225 27 -
------------------ ----------------- -----------------
Net cash (used in) provided by investing activities (1,907) (15,786) 5,513
------------------ ----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of convertible notes - 86,250 -
Deferred financing costs of convertible notes - (3,519) -
Proceeds from exercises of stock options 3,146 6,356 1,424
Principal payments on capital lease obligation (1,705) (298) -
Proceeds from issuance of common stock - 6,344 -
------------------ ----------------- -----------------
Net cash provided by financing activities 1,441 95,133 1,424
------------------ ----------------- -----------------
Net (decrease) increase in cash and cash equivalents (25,379) 60,438 (10,479)
Cash and cash equivalents, beginning of period 70,881 10,443 20,922
------------------ ----------------- -----------------
Cash and cash equivalents, end of period $ 45,502 $ 70,881 $ 10,443
================== ================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- 50 -
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years ended December 31,
1997 1996 1995
----------------- --------------- ----------------
<S> <C> <C> <C>
Cash Flows Provided By Other Working Capital Items:
Decrease (increase) in:
Accounts receivable $ 3,842 $ (2,166) $ (2,000)
Inventory (948) (1,286) (266)
Prepaid expenses and other current assets (81) 38 (264)
Increase (decrease) in:
Accounts payable 1,431 (1,638) 404
Other current liabilities 1,512 3,234 2,070
----------------- --------------- ----------------
Net cash provided by (used in) other working capital items $ 5,756 $ (1,818) $ (56)
================= =============== ================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 6,249 $ 2,758 $ -
================= =============== ================
Equipment acquired through capital lease $ - $ 7,665 $ -
================= =============== ================
Conversion of subordinated notes to common stock $ 2,516 $ - $ -
================= =============== ================
Use of stock to exercise stock options $ 1,890 $ - $ -
================= =============== ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- 51 -
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
North American Vaccine, Inc. and Subsidiaries (the "Company") is
engaged in the research, development, production, and sale of vaccines for the
prevention of infectious diseases in children and adults.
The Company was incorporated in Canada on August 31, 1989 to
consolidate the assets, liabilities and operations of American Vaccine
Corporation ("American Vaccine"), and certain assets and vaccine-related
technologies of BioChem Pharma Inc. ("BioChem"), in a share purchase and merger
transaction (the "Merger"). On February 28, 1990, the shareholders of American
Vaccine approved the Merger. Prior to February 28, 1990, the Company had no
operations.
Pursuant to the Merger, shareholders of American Vaccine exchanged
their shares for 50 percent ownership of the Company. Simultaneously, BioChem
purchased a 50 percent interest in the Company for cash, shares of BioChem
common stock, and certain rights in BioChem's vaccine-related technologies. The
net assets of American Vaccine, common stock of BioChem, and the rights in
vaccine-related technologies transferred by BioChem were carried forward to the
Company at their previously recorded amounts as reflected in the historical
financial statements of BioChem and American Vaccine.
(2) RISK FACTORS
The Company has generated only limited revenue from the sale of its
acellular pertussis vaccine. Prior to commercial introduction of Certiva(TM)
(the Company's DTaP vaccine for the prevention of diphtheria, tetanus, and
pertussis), and its combination vaccines, the Company must receive regulatory
approval from the U.S. Food and Drug Administration ("FDA") for sales in the
United States and by similar authorities for sales in other countries. A
European formulation of Certiva(TM) and a stand-alone aP vaccine have been
approved for sale in Sweden, and a DTaP-IPV vaccine has been approved for sale
in Denmark. Certiva(TM) is currently being considered for approval for sale in
the United States by the FDA. There can be no assurance as to when or whether
the Company will receive such approval, or that any such approval will not be
subject to additional testing requirements or other limitations that may affect
the commercialization of the product. The commercial introduction of Certiva(TM)
will require the Company to manufacture and produce large quantities of vaccine
in its manufacturing facility, which has been and continues to be modified for
increased production. The Company has limited experience in manufacturing
commercial quantities of its vaccines, including Certiva(TM), and operating its
manufacturing facilities. Accordingly, there can be no assurance that the
production process will not fail at any point or become subject to substantial
disruptions. To successfully introduce and commercialize Certiva(TM), the
Company will be required to, among other things, participate in established
purchasing programs of Federal and state governments, establish an identity and
reputation for the Company and its products, create an awareness among
pediatricians of the safety and efficacy of the vaccine, distinguish the
Company's product from that of its competitors, establish the Company as an
effective and reliable supplier of vaccines, produce sufficient quantities of
vaccine and establish effective distribution channels. The Company and Abbott
Laboratories ("Abbott") have signed an agreement for Abbott to market
Certiva(TM) and certain combination vaccines in the United States to the private
physician and managed care markets upon approval by the FDA, with the Company
marketing those products to government purchasers. There can be no assurance
that the Company or Abbott will successfully implement its sales and marketing
strategy. In attempting to do so, the Company believes there will be intense
competition from other vaccine producers. There can be no assurance that the
- 52 -
<PAGE>
Company will produce a commercially viable product, attain sufficient market
share, distinguish its vaccine product from that of its competitors, or achieve
profitability from the sale of Certiva(TM) or any of its other vaccine products.
Currently, the Company's prospects for becoming profitable are
substantially dependent upon the successful commercialization of Certiva(TM), as
well as the successful development and commercialization of other vaccines under
development. There can be no assurance that the Company will be able to
successfully manufacture or market Certiva(TM) or any other vaccine product at
levels sufficient to generate profits.
The production of vaccines is a highly complex, biological process
involving many steps, commencing from seed culture through final production. The
production process could fail at any point resulting in the failure and
continued inability to meet production requirements. 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 not continue in the future or affect the
Company's ability to obtain regulatory approval for its products or the timing
of such approval or affect the Company's ability to produce vaccines. No
assurances can be given that the Company will be successful in establishing and
maintaining consistent manufacture 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(TM) are located principally in one
facility. Any condition or event that adversely affects the 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.
While the Company produces the pertussis component of Certiva(TM), it
has purchased, and intends to continue to purchase, its requirements of the
diphtheria and tetanus toxoids from Statens Seruminstitut ("SSI") and enhanced
IPV from SSI and another supplier. There can be no assurance that these
suppliers will be able to meet the Company's requirements, that their components
will be supplied on commercially reasonable terms, or that they will not
experience difficulties in obtaining necessary regulatory approvals or
disruptions in their production of diphtheria and tetanus toxoids or IPV.
Certain of the Company's production processes require raw materials
from sole sources or materials that are difficult for suppliers to produce and
certify to the Company's specifications. The Company also may experience
temporary or permanent shortages of critical raw materials necessary for
continued production of its vaccines. Any shortage of these materials could
delay production efforts, adversely impact production costs and yields, or
necessitate the use of substitute materials, any of which could have a
significant adverse impact on the Company's operations. In addition, the Company
has contracted with third parties for the sterile fill, labeling, and packaging
of its vaccine products until the Company obtains its own facilities to perform
these operations. Failure of any such contractor to meet the Company's
requirements could have a material adverse effect on the Company, may involve
costly delays and significant expense, and would require additional regulatory
approval as the Company seeks alternative arrangements.
Children in the United States receive immunizations from public
providers, such as local health departments, as well as from private providers.
Immunizations provided by public providers are generally paid for through
federal and state government funding under public health programs. These
- 53 -
<PAGE>
programs are intended to reduce barriers to immunization and to improve
immunization rates by providing free vaccine to qualifying infants and children.
Government purchases historically have been at prices substantially below those
offered to the private sector and presently account for a substantial portion of
the vaccine doses distributed in the United States. From time to time,
legislative and regulatory initiatives are proposed that, if adopted, could
significantly modify government vaccine programs by, among other things,
modifying or restricting the federal government's purchasing authority or
substantially increasing or reducing the funding available for government
vaccine purchases. The Company is unable to predict which legislative
initiative, if any, will ultimately be enacted or the effect any such initiative
may ultimately have on the Company's business or results of future operations.
In addition, proposals for health-care, insurance and tax reform may be
considered in the future by federal and state governments and some of these
proposals, if adopted, may limit government or third-party, private
reimbursement policies, or prices charged by pharmaceutical and vaccine
manufacturers for their product.
The Company has little experience in marketing its products. The
Company is in the process of implementing its marketing and sales plans for its
products; however, there can be no assurance that the Company's current
marketing and sales strategies or the size and make-up of the Company's sales
and marketing organization will be sufficient for the successful
commercialization of its products. The factors affecting successful commercial
launch of the Company's vaccines in the United States include, among others:
establishing an identity and reputation for the Company and its products;
creating an awareness among pediatricians of the safety and efficacy of the
Company's vaccines; distinguishing the Company's products from those of its
competitors; establishing the Company as an effective and reliable supplier of
vaccines; producing sufficient quantities of vaccine; and establishing effective
distribution channels.
The vaccine industry traditionally has placed considerable importance
on obtaining and maintaining patent and trade secret protection for significant
new technologies, products and processes. The Company believes that such
protection will be an important factor in its success and may require the
expenditure of substantial resources. Many companies, universities and research
institutions have applied for and/or obtained patents for vaccine products and
technologies that may be competitive or inconsistent with those held by or
licensed to the Company. No assurances can be given as to the degree and range
of protection any patents will afford the Company, that additional patents will
be issued to the Company, or as to the extent to which the Company will be
successful in avoiding any patents granted to others. Further, there can be no
assurance that others have not or will not independently develop or otherwise
properly gain access to technology or information that is substantially similar
to that which is unpatented yet considered proprietary by the Company. The
Company also may desire or be required to obtain licenses from others in order
to develop, produce and market commercially viable products effectively. Failure
to obtain those licenses could have a significant adverse effect on the
Company's ability to commercialize its vaccine products. There can be no
assurance that such licenses will be obtainable on commercially reasonable
terms, if at all, that the patents underlying such licenses will be valid and
enforceable or that the proprietary nature of the unpatented technology
underlying such licenses will remain proprietary. There has been, and the
Company believes that there may be in the future, significant litigation in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume substantial resources.
Competition in the vaccine industry is intense. Competitors of the
Company both in the United States and internationally include major
pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions. Many of these competitors are
actively developing competing vaccines. Many of these competitors have
substantially greater resources, more extensive experience in conducting
clinical testing and obtaining regulatory approvals for their products, greater
operating experience, larger research and development and marketing staffs, and
- 54 -
<PAGE>
greater production capabilities than those of the Company. In addition, the
vaccine industry is subject to significant technological change. There can be no
assurance that the Company's competitors will not succeed in designing around
the Company's patents, developing technologies and products that are as or more
effective than any that have been or are being developed by the Company, or
developing technologies and products that would render the Company's technology
and products obsolete and noncompetitive.
The testing and marketing of vaccine products entail an inherent risk
of product liability. Although the Company has limited product liability
insurance coverage, it intends to seek additional insurance coverage as it
commences commercialization of its products. There can be no assurance that
adequate additional insurance coverage will be available at acceptable cost, if
at all, or that a product liability claim would not materially adversely affect
the business or financial condition of the Company. To the extent the Company is
not covered by insurance, the Company faces potential liability that could be
substantial in the event of claims.
The Company had cash and cash equivalents of $45.5 million at December
31, 1997. The Company's cash utilization for operations, net of amounts received
under marketing, research and development agreements, was $10.5 million in the
fourth quarter of 1997 and $37.9 million for the year ended December 31, 1997.
Total capital expenditures were $2.1 million for 1997. These levels of cash
expenditure have continued in the first quarter of 1998. Management is
developing plans to access other sources of funding or take other necessary
actions as appropriate to address future cash utilization for operations, which
plans may depend on the timing of FDA licensure of Certiva(TM). Cash
requirements for operations and capital expenditures for 1998 are expected to be
financed through a combination of: cash and cash equivalents, fees and payments
from existing and/or new license marketing, distribution and/or development
agreements; the exercise of stock options; the sale of debt and/or equity
securities; mortgage financing; lines of credit; and equipment leases. The
Company currently has no agreements or understandings regarding any debt or
equity financing.
(3) SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF ACCOUNTING AND CURRENCY. The accompanying consolidated
financial statements have been prepared in conformity 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 6. The effect of foreign currency translation has been
immaterial.
(b) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of North American Vaccine, Inc. and its subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.
(c) 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.
(d) CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents consist primarily of commercial paper and
U.S. Treasury Bills.
- 55 -
<PAGE>
(e) 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. Inventories consist of the following (in thousands):
1997 1996
------------------------
Raw materials $2,584 $1,518
Work-in-process 0 162
Finished goods 146 102
====== ======
$2,730 $1,782
====== ======
(f) 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.
(g) RESEARCH AND DEVELOPMENT COSTS. The Company expenses all research
and development costs as incurred. Under Canadian GAAP, certain development
costs should be deferred to future periods if certain criteria are met. No costs
have been capitalized for Canadian GAAP purposes because the Company believes
that the applicable deferral criteria have not been met.
(h) DEPRECIATION AND AMORTIZATION. Depreciation of property, plant and
equipment, with the exception of leasehold improvements and an owned facility,
is provided using an accelerated method over the estimated useful lives of the
assets. The estimated useful lives are generally five to seven years for
machinery, equipment and laboratory fixtures. Leasehold improvements are
amortized over the term of the lease. The Company's owned facility is
depreciated on a straight-line basis over twenty years.
(i) DEFERRED FINANCING COSTS. Deferred financing costs represent fees
and other costs incurred in connection with the issuance of the 6.50%
convertible notes. These costs are amortized over the term of the related debt
using the effective interest rate method. Total accumulated amortization through
December 31, 1997 and 1996 was $838,000 and $335,000, respectively.
(j) INCOME TAXES. The Company computes deferred tax assets or
liabilities based on the difference between the financial statement and income
tax bases of assets and liabilities using the enacted tax rate.
(k) BASIC AND DILUTED NET LOSS PER COMMON SHARE. In March 1997, the
Financial Accounting Standards Board ("FASB") issued 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 the
year ended December 31, 1997. 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 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 December 31, 1997, 1996 and 1995, were not
included in the computation of diluted loss per share as their effect would have
- 56 -
<PAGE>
been anti-dilutive. As a result, the basic and diluted loss per share amounts
are identical for all periods presented.
(4) PRODUCTION, DEVELOPMENT, AND MARKETING CONTRACTS
(a) AGREEMENTS WITH PASTEUR MERIEUX-CONNAUGHT. In the December 1995
clinical development agreement and license agreement with Pasteur Merieux-
Connaught, the parties agreed to jointly develop the Company's new conjugate
vaccine against Group B meningococcus for both adult and pediatric indications.
The Company recognized $3, $4, and $6 million of research and development
revenue for non-refundable payments made by Pasteur Merieux-Connaught in 1995,
1996, and 1997, respectively, in connection with the clinical development
agreement. Further fees and funding will be made upon achievement of
development, clinical and regulatory milestones. In addition, the Company will
receive royalties on any product sales by Pasteur Merieux-Connaught.
Under the clinical development agreement, the parties will jointly
develop the vaccine through Phase II clinical trials, and each party will have
access to and the right to use the clinical trial results. Pasteur Merieux-
Connaught will be responsible for all costs associated with the clinical
development of the Group B meningococcal vaccine through the completion of Phase
II clinical trials. The Company will retain co-exclusive world-wide rights to
manufacture and sell the Group B meningococcal vaccine both as a stand-alone
product and in combination with other vaccines. Pasteur Merieux-Connaught may
elect to terminate the agreements at any time.
(b) AGREEMENT WITH ABBOTT LABORATORIES. In 1996, the Company and Abbott
signed an agreement under which Abbott would market Certiva(TM), the Company's
DTaP vaccine, when approved by the FDA. The marketing agreement also will allow
Abbott to market the Company's DTaP- HIB, DTaP-IPV and DTaP-IPV-HIB combination
vaccines which are under development.
Abbott will market Certiva(TM) and 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.
On execution of the agreement, the Company received $13 million of
which approximately $6.3 million represented payment for 350,000 shares of the
Company's common stock, and the balance represented a marketing fee and clinical
development funding. The Company also received $3 million in 1997 for clinical
development funding. The Company and Abbott will collaborate in the clinical
development of the combination vaccines and Abbott will provide the Company with
clinical development funding. Amounts received for clinical development to be
expended in the future by the Company have been recorded as deferred revenue. In
addition, the Company will receive payments upon achievement of prescribed
milestones. The agreement provides for total payments of up to $42 million by
Abbott, including the $16 million received through December 31, 1997. The first
milestone relates to FDA approval of Certiva(TM) provided certain other
conditions are satisfied. 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. Abbott may terminate this arrangement at
any time with advance notice.
(c) PRODUCT SALES. In February 1996, the Swedish Medical Products
Agency granted regulatory approval to market a combined DTaP vaccine that
contains the Company's acellular pertussis vaccine for all primary and booster
doses. In September 1996, the Danish National Board of Health granted regulatory
approval to market a combined DTaP-IPV (polio) vaccine, which includes the
- 57 -
<PAGE>
Company's acellular pertussis vaccine, for all primary and booster doses for
infants and children in Denmark. SSI formulates and markets the DTaP vaccine in
Sweden, and the DTaP-IPV vaccine in Denmark, and has filed additional
applications for these vaccines in other countries within its territory. There
can be no assurance given that such additional applications will be approved by
the appropriate regulatory authorities or that any further application will be
filed or approved.
Following the regulatory approvals described above, the Company has
recognized revenues from sale of its acellular pertussis vaccine. Additional
revenues from such product sales are dependent upon successful commercialization
of the DTaP vaccine in Sweden and the DTaP-IPV vaccine in Denmark and additional
product approvals of acellular pertussis products in other countries. The
Company does not control the marketing and distribution efforts of third party
distributors in their respective territories and, therefore, the Company's
revenues for product sales in those territories are dependent upon effective
sales, marketing and distribution efforts of such parties. There are no
assurances if or when further product approvals will be obtained, or that the
vaccines will be marketed and distributed effectively.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were recorded at cost and consisted of
the following components:
AS OF DECEMBER 31,
1997 1996
---- ----
(in thousands)
Property, plant and equipment:
Land $ 498 $ 498
Building and improvements 2,421 2,407
Machinery, equipment and laboratory fixtures 42,380 41,405
Leasehold improvements 8,587 8,567
Office furniture, equipment and software 4,398 3,488
------- -------
58,284 56,365
Accumulated depreciation and amortization:
Building and improvements 250 129
Machinery, equipment and laboratory fixtures 19,885 10,728
Leasehold improvements 4,423 3,537
Office furniture, equipment and software 2,298 1,342
------- -------
26,856 15,736
------- -------
Property, plant and equipment, net $31,428 $40,629
======= =======
In 1996, the Company entered into an agreement which included the
assumption of a lease of a 35,000 square foot manufacturing facility and the
purchase and lease of equipment and leasehold improvements. See Note 8 for
further description of the transaction.
(6) INVESTMENTS IN AFFILIATES
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," equity securities classified as available-for-sale
are reported at fair value, with unrealized gains and losses reported as a
separate component of shareholders' equity. As a result, the Company's
investments in its affiliates are reflected at their current market value as of
- 58 -
<PAGE>
December 31, 1997 and 1996, of $843,000 and $1.3 million, respectively (original
cost of $629,000).
In 1995, the Company sold the remaining 695,936 shares of its
investment in BioChem stock (see Note 16). The gross proceeds and the realized
gain from the sales were $11.5 and $10.9 million, respectively. The Company also
sold 156,916 shares of its investment in IVAX Corporation common stock. The
gross proceeds and the realized gain from the sales were $4.3 and $3.5 million,
respectively.
In 1996, the Company sold 193,084 shares of its investment in IVAX
stock. The gross proceeds and the realized gain from the sales were $5.2 and
$4.2 million, respectively. The historical cost of the remaining 125,000 shares
of IVAX common stock was $629,000 or $5.03 per share at December 31, 1997.
The market values of these securities as of December 31, 1997 and 1996,
as disclosed on the accompanying consolidated balance sheets, have been
determined based on the closing prices for registered securities of IVAX as of
those dates. The aggregate market value of the Company's remaining investment in
IVAX common stock at March 17, 1998, was approximately $1.2 million. These
investment securities are volatile and, therefore, are subject to significant
fluctuations in value.
(7) OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following components:
AS OF DECEMBER 31,
1997 1996
---- ----
(in thousands)
Payroll and fringe benefits $ 1,488 $ 1,114
Accrued interest 959 999
Reserve for contract loss 720 720
Accrued taxes 642 608
Other accrued liabilities 605 534
Accrued consulting and professional fees 381 144
Accrued costs of clinical trials 269 421
------- -------
Total other current liabilities $ 5,064 $ 4,540
======= =======
(8) COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES. The Company has a lease agreement for its
production facility through February 28, 1999. The Company has the option of
extending this lease for an additional ten years at the then fair market value.
Under the terms of the lease of this facility, the lessor reimbursed the Company
for $625,000 of improvements made to the property. This reimbursement has been
reflected as a deferred rent credit, which is being amortized over the term of
the lease. The lease provides for minimum annual escalations of the base rent.
These escalations are recorded as expense ratably over the term of the lease.
The Company has renewed its office space lease through December 31,
2000, and has one three-year renewal option remaining. The Company may terminate
this lease with a six month advance notice.
- 59 -
<PAGE>
In December 1993, the Company signed a sublease agreement to rent space
for a research and development facility through April 30, 1998. In October 1996,
the Company signed a sublease agreement to rent additional space adjacent to the
existing research and development facility through April 30, 1998.
In November 1996, the Company assumed a lease to rent 35,000 square
feet of space for a development and production facility through February 1,
2001, with two five-year renewal options. The lease provides for minimum annual
escalations of the base rent.
In 1998 the Company reached a preliminary understanding with a real
estate investment trust to lease an approximately 75,500 square foot facility
for a period of ten years, with two five-year renewal options. The initial base
annual rent under the lease would be 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 would have an option to purchase the facility during specified periods
of the lease term. The trust would provide the Company with an allowance of
approximately $1.4 million for tenant improvements, and would make available to
the Company a line of credit of up to approximately $1.8 million to fund any
additional improvements 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 trust. The
negotiations on these agreements are substantially completed and these
agreements may be executed in the near future. There can be no assurances that
the Company will be able to negotiate successfully and sign a definitive lease
for the facility or the line of credit, or that, if these documents are
executed, the financial terms thereof will not be materially different.
Minimum future lease payments under all signed lease agreements,
exclusive of real estate tax escalations, are as follows:
YEARS ENDING
DECEMBER 31,
(in thousands)
1998 $ 1,127
1999 810
2000 762
2001 71
2002 -
---------
Total $ 2,770
=========
Total rent expense was $1,232,000; $898,000; and $812,000 in 1997,
1996, and 1995, respectively.
(b) CAPITAL LEASE. In connection with the operating lease agreement
described above that was entered into in 1996, the Company also entered into an
agreement that included the purchase and lease of equipment and leasehold
improvements. The total acquisition cost was approximately $24.9 million, which
included a cash payment of $17.2 million. The balance of $7.7 million was
financed through an equipment lease obligation which expires in 2000. In 1997,
the Company disposed of approximately $457,000 of this equipment recognizing a
non-cash loss of approximately $97,000. The equipment lease has been accounted
for as a capital lease for financial reporting purposes, with monthly payments
of approximately $174,000. As of December 31, 1997, the total obligation under
this capital lease was $5.7 million. Total depreciation expense associated with
equipment under the capital lease was approximately $4.1 million for 1997. Under
the terms of the equipment lease, the Company has a buyout option at the end of
the third year for a predetermined amount, and a buyout option at the end of the
fourth year at the greater of the fair market value of the equipment or a
predetermined amount. Under the equipment lease agreement there are financial
covenants that obligate the Company to maintain certain minimum cash and
- 60 -
<PAGE>
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 the predetermined amounts at such time as the Company is not in compliance
with any of these financial covenants. In addition, the Company may at any time
eliminate these financial covenants by posting a letter of credit for a
predetermined amount. Minimum future lease payments are as follows:
YEARS ENDING
DECEMBER 31,
(in thousands)
1998 (includes interest of $481) $ 2,074
1999 (includes interest of $320) 2,074
2000 (includes interest of $139) 2,495
2001 -
--------
Total 6,643
Less interest component (940)
--------
Total principal payments $ 5,703
========
(c) CONTINGENCIES. In prior years, the Company was awarded various
cost-plus-fixed-fee contracts by the National Institute of Child Health and
Human Development ("NICHD"). Performance under these contracts was completed in
1993. Provisional payments to the Company under cost- reimbursable contracts are
subject to adjustment upon completion of audits of reimbursable costs by the
NICHD. In the opinion of management, adjustments, if any, resulting from the
audits of the contracts are not expected to have a material adverse impact on
the Company's financial position or future results of operations.
The Company is, and from time to time becomes, involved in various
claims and lawsuits that are incidental to its business. In the opinion of the
Company's management, there are no material legal proceedings pending against
the Company.
(9) CONVERTIBLE SUBORDINATED NOTES
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 semi-annually on May 1 and November 1 of each
year. The notes are convertible into common shares of the Company at the
conversion price of approximately $24.86 per common share. The notes 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 common shares. In
December 1997, the Company issued 101,207 shares of common stock upon conversion
of $2,516,000 principal amount of notes.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the Company's consolidated balance
sheets at December 31, 1997 and 1996, for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair values due
- 61 -
<PAGE>
to the short maturity of those instruments. Management believes the carrying
value of the convertible subordinated notes and the capital lease obligation
approximates fair value.
(11) INCOME TAXES
The operations of the Company are taxed under Canadian income tax laws
and the operations of its United States branch are taxed under United States
income tax laws subject to applicable treaty provisions for the avoidance of
double taxation. The Company's wholly owned subsidiaries, American Vaccine and
AMVAX, Inc., are both taxed under United States income tax laws.
For income tax reporting purposes in 1995, the Company realized a net
gain in Canada and a net loss in the United States. In 1997 and 1996, the
Company incurred a loss for income tax reporting purposes in Canada and the
United States. The Company had sufficient net operating loss carryforwards to
offset the 1995 taxable income in Canada. Accordingly, no provision or benefit
for United States or Canadian income taxes has been recorded in the accompanying
financial statements.
The components of the net deferred tax assets consisted of:
AS OF DECEMBER 31,
1997 1996
---- ----
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $38,489 $25,314
Accrued intercompany interest 4,172 3,097
Depreciation and amortization 1,497 1,143
Reserve for contract loss 278 278
Deferred rent 46 81
Other 2,447 3,323
---------- ---------
Total deferred tax assets 46,929 33,236
Deferred tax liabilities:
Historical accrual to cash difference (1,489) (2,235)
Investments in affiliates (312) (433)
Other - (85)
------------ ----------
Total deferred tax liability (1,801) (2,753)
------------ --------
Net deferred tax assets before allowance 45,128 30,483
Less: Valuation allowance (45,128) (30,483)
------------ -----------
Net deferred tax assets $ -- $ --
============ ===========
- 62 -
<PAGE>
The Company has determined that $45.1 million in 1997 and $30.5 million
in 1996 of net deferred tax assets do not satisfy the recognition criteria set
forth in SFAS No. 109. Accordingly, a valuation allowance was recorded against
the applicable net deferred tax assets.
At December 31, 1997, the Company had net operating loss carryforwards
of approximately $99.4 million. Of this consolidated total, approximately $22.3
million of the Company's net operating loss carryforwards are available to
offset future Canadian-sourced taxable income, if any. These loss carryforwards
expire between 1999 and 2004. Of the remaining balance, American Vaccine and
AMVAX had net operating loss carryforwards of approximately $76.1 million and
$911,000, respectively, available to offset future United States taxable income,
if any. These loss carryforwards expire between 2002 and 2012.
The net operating loss carryforwards available to be used in any given
year may be limited due to significant changes in ownership interests resulting
from future stock issuances or other changes in equity interests.
(12) INDEMNIFICATION AGREEMENT
In connection with the Merger described in Note 1, certain shareholders
of American Vaccine with significant ownership interests were required to file
gain recognition agreements with the United States Internal Revenue Service.
Under the terms of the gain recognition agreements, these shareholders have
agreed to amend their income tax returns for 1990 if the Company disposes of
substantially all of the stock or assets of American Vaccine within a ten-year
period. With those amended returns, the shareholders will be required to pay tax
based on the difference between their basis in American Vaccine stock and the
value, at February 28, 1990, of the Company stock received in the Merger, plus
interest from the time of the Merger to the disposition of American Vaccine
stock or assets by the Company.
In connection with the Merger, the Company entered into an
indemnification agreement with these shareholders of American Vaccine whereby
the Company will (i) lend to the affected shareholders, on an interest-free and
after-tax basis, an amount equal to the taxes to be paid with the amended tax
returns; and (ii) pay to the affected shareholders, on an after-tax basis, any
interest and penalties with respect to the taxes to be paid with the amended tax
returns. Under the terms of the indemnification agreement, repayment of the
loans described above will only be required at the time and to the extent that
the affected shareholders receive benefit from the resulting increase in the tax
basis of their Company stock. There can be no assurance that any such benefit
will be received.
The ultimate amount of this potential liability, if any, is not
presently determinable but will be based on the amount of gain, interest rates
in effect during the period, and the length of time between the consummation of
the Merger and the event triggering the gain recognition. Based on current
interest rates, the Company estimates that, in the event that the gain
recognition would have occurred at December 31, 1997, its obligations to the
affected shareholders could approximate $15.6 million.
(13) LICENSE AGREEMENTS
Certain of the conjugate vaccine-related technologies transferred to
the Company by BioChem in connection with the Merger are licensed under two
agreements with the National Research Council of Canada (the "NRC"), a Canadian
federal governmental agency. Under these license agreements, the Company will be
required to pay royalties to the NRC on all sales of such licensed products and
related services. Certain minimum annual royalties are payable irrespective of
- 63 -
<PAGE>
the volume of sales of such products and services. BioChem had agreed to
reimburse the Company for 10 percent of these minimum annual royalties, which
was terminated in 1996 (see Note 16). The NRC has the right to terminate the
license agreements under certain specified conditions including if it concludes
that all reasonable efforts are not being used to develop and commercialize the
technologies.
The Company has a license agreement with the National Technical
Information Service (the "NTIS"), an agency of the United States government, to
bring the method of preparing the acellular pertussis vaccine to the point of
practical application. In return, the NTIS granted an exclusive license to make,
have made, use and sell the vaccine following approval of commercial sale by the
FDA. Under the agreement, the Company will pay to the NTIS an annual maintenance
fee and a royalty based on sales or other similar dispositions of the vaccine.
The exclusive rights under this agreement will terminate seven years from the
date of the first commercial sale of the vaccine. The Company has acquired a
royalty-bearing exclusive license for the use of this patented technology in
certain foreign jurisdictions for the full term of the patents.
(14) SHAREHOLDERS' EQUITY
(a) PREFERRED STOCK. Preferred shares are nonvoting (other than as
required by law) and may be issued in one or more series. Shares of Series A
preferred stock are convertible, at the option of the holder, into common stock
on the basis of two shares of common stock for each share of preferred stock
held. The preferred stock had a liquidation preference of Can. $2.50 per share
or U.S. $3.5 million in the aggregate at December 31, 1997. The conversion ratio
is subject to adjustment for certain dilutive events.
(b) 1990 SHARE OPTION PLAN. In 1990, the Company adopted the North
American Vaccine, Inc. Share Option Plan (the "1990 Plan"), which, as amended,
provided for the issuance of up to 3,650,000 shares of its common stock to
officers, directors, employees and consultants. The 1990 Plan, which expired in
February 1995, provided that options be granted at no less than market value on
the date of grant. In 1996 the Company extended the expiration date for options
to purchase 540,000 shares of common stock previously granted under this plan.
The fair market value of the Company's stock on the new grant date was less than
the exercise price of these options, therefore no expense was recorded. In 1997,
the Company extended the expiration date for an option to purchase 150,000
shares of common stock previously granted under this plan. The Company
recognized approximately $1.3 million of expense representing the difference
between the fair market value and the exercise price of the option on the new
grant date. For accounting purposes, the extensions of these options have been
treated as new grants.
(c) 1995 SHARE OPTION PLAN. In 1995, the Company adopted the North
American Vaccine, Inc. 1995 Share Option Plan (the "1995 Plan"), which provides
for the issuance of up to 1,000,000 shares of its common stock to officers,
directors, employees and consultants. The 1995 Plan, which expires in March
2000, provides that options be granted at no less than market value on the date
of the grant and may have a term of up to 10 years.
The following table summarizes option activity outside of any formal
stock option plan and under both the 1990 Plan and the 1995 Plan for the period
from December 31, 1994, through December 31, 1997:
- 64 -
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
------------------------------------------
1990 Plan 1995 Plan Non-Plan Exercise Wtg.Avg.
Options Options Options Price Exer.Price
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 2,118,555 -- 358,438 $1.19-13.63 $ 8.15
Granted 172,500 505,000 -- 9.13-14.13 12.44
Exercised (487,688) -- (11,562) 1.19- 2.00 1.84
Expired or canceled (156,467) -- -- 1.81-12.88 11.83
------------------------------------------------------------------------
Balance at December 31, 1995 1,646,900 505,000 346,876 1.56-14.13 10.34
Granted 540,000 18,500 -- 12.88-21.50 13.16
Exercised (428,231) -- (231,252) 1.56-12.88 7.08
Expired or canceled (558,987) (24,000) -- 9.13-13.88 12.82
------------------------------------------------------------------------
Balance at December 31, 1996 1,199,682 499,500 115,624 2.92-21.50 11.59
Granted 150,000 500,500 -- 11.13-24.50 18.69
Exercised (230,964) (19,291) (57,812) 9.00-13.88 9.66
Expired or canceled (153,069) (67,738) -- 9.13-24.50 14.68
------------------------------------------------------------------------
Balance at December 31, 1997 965,649 912,971 57,812 $ 2.92-24.50 $13.93
========== ========= ========= ========== ======
</TABLE>
At December 31, 1997, under the 1990 Plan, options to purchase an
aggregate of 965,649 common shares were exercisable at prices ranging from $9.00
to $13.63 per share (weighted average exercise price per share of $11.62), and
no options were available for grant. At December 31, 1997, under the 1995 Plan,
options to purchase an aggregate of 912,971 common shares were exercisable at
prices ranging from $11.25 to $21.50 per share (weighted average exercise price
per share of $17.08), and 67,738 options were available for grant.
The weighted-average per share grant date fair value of options granted
during 1997 and 1996 for the 1990 Plan was $8.76 and $5.11, respectively. The
weighted-average per share grant date fair value of options granted during 1997
and 1996 for the 1995 Plan was $6.62 and $10.59, respectively.
(d) 1990 NON-EMPLOYEE DIRECTOR AND SENIOR EXECUTIVE STOCK OPTION PLAN
("1990 SESOP"). In 1990, the Company adopted the 1990 SESOP, which, as amended,
provided for the issuance of up to 1,850,000 shares of its common stock to all
the Company's non-employee directors, and senior executives who are residents of
Canada. Under the 1990 SESOP, which expired in October 1995, options were
granted automatically to each non-employee director annually on January 1. The
1990 SESOP required that the exercise price must not be less than the market
value of the stock at the date of grant. Options issued to non-employee
directors under the 1990 SESOP are exercisable in Canadian currency, vest
ratably over a period of three years and expire five years from the date of
grant. Upon a change of control of the Company, all outstanding stock options
granted under the 1990 SESOP become fully exercisable.
(e) 1995 NON-EMPLOYEE DIRECTOR AND SENIOR EXECUTIVE STOCK OPTION PLAN
("1995 SESOP"). In 1995, the Company adopted the 1995 SESOP, which provides for
the issuance of up to 500,000 shares of its common stock to all the Company's
non-employee directors, and its senior executives who are residents of Canada.
Under the 1995 SESOP, which expires in March 2000, options are granted
automatically to each non-employee director annually on January 1. The 1995
SESOP requires that the exercise price must not be less than the market value of
the stock at the date of grant. Options issued to non-employee directors vest
ratably over a period of three years and expire ten years from the date of
grant.
- 65 -
<PAGE>
Upon a change of control of the Company, all outstanding stock options granted
under the 1995 SESOP become fully exercisable.
The following table summarizes option activity under the 1990 SESOP
plan and the 1995 SESOP plan from December 31, 1994 through December 31, 1997:
<TABLE>
<CAPTION>
1990 Plan 1995 Plan Exercise Price Wtg.Avg.
Options Options Can.$ U.S. $ Exer.Price(U.S.)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,000,002 -- $1.40-15.10 $1.02-11.02 $ 6.17
Granted 120,000 -- 11.75 8.57 8.57
Exercised (420,002) -- 1.40- 1.88 1.02- 1.37 1.21
----------------------------------------------------------------------------
Balance at December 31, 1995 700,000 -- 1.88-15.10 1.37-11.02 9.56
Granted -- 130,000 -- 14.13 14.13
Exercised (199,999) -- 1.88-15.10 1.37-11.01 8.47
Expired or canceled (10,001) (10,000) 11.75-14.56 8.58-14.13 11.69
---------------------------------------- -------------------------------
Balance at December 31, 1996 490,000 120,000 11.75-15.10 8.58-14.13 10.82
Granted -- 130,000 -- 24.38 24.38
Exercised (190,000) -- 12.88-15.10 9.01-10.56 10.31
Expired or canceled -- -- -- -- --
----------------------------------------------------------------------------
Balance at December 31, 1997 300,000 250,000 $11.75-14.56 $8.22-24.38 $13.83
========= ======== =========== ============ ========
</TABLE>
At December 31, 1997, under the 1990 SESOP, 263,329 options were
exercisable at prices ranging from Can. $11.75 to Can. $14.56 (U.S. $8.22 to
U.S. $10.18) per share (weighted average U.S. price of $9.15) and no options
were available for grant under the 1990 SESOP. At December 31, 1997, under the
1995 SESOP, 39,996 options were exercisable at a per share price of U.S. $14.13,
and 250,000 options were available for grant. Subsequent to year end, options to
acquire an additional 130,000 shares were granted under this plan at an exercise
price of U.S. $24.94. The weighted-average per share grant date fair value of
options granted during 1997 and 1996 for the 1995 SESOP plan was U.S. $8.27 and
U.S. $10.58, respectively.
(f) STOCK BASED COMPENSATION PLANS. The Company applies the intrinsic
value based method of accounting pursuant to APB Opinion No. 25, "Accounting For
Stock Issued To Employees," and related interpretations for option grants under
its stock based compensation plans. Accordingly, no compensation cost has been
recognized in the accompanying financial statements. Had compensation cost for
the Company's four stock option plans been determined on the fair value based
method of SFAS 123, "Accounting for Stock-Based Compensation," at the grant
dates for awards under these plans, the Company's net loss and loss per share
for 1997, 1996 and 1995 would have been $47.5 million or a loss of $1.50 per
share, $23.9 million or a loss of $0.78 per share, and $6.7 million or a loss of
$0.22 per share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
- 66 -
<PAGE>
stock options. Pursuant to SFAS 123, the fair value of each option grant is
estimated on the date of grant using a Black- Scholes option pricing model with
the following weighted average assumptions used for grants in 1997, 1996, and
1995, respectively: risk-free interest rates of 6.04-7.59 percent for the 1990
Plan options, 5.26- 6.99 percent for the 1995 Plan options, 7.79 percent for the
1990 SESOP options and 5.21-6.47 percent for the 1995 SESOP options; no expected
dividend yields; expected lives of 4 years for the 1990 Plan options, between 5
and 6 years for the 1995 Plan options, 4 years for the 1990 SESOP options, and 8
years for the 1995 SESOP options; and expected volatilities of 58 and 78
percent. Of the 2,486,432 options outstanding at December 31, 1997, 1,528,924
options have a weighted average remaining contractual life of approximately 2.8
years. All of these options are exercisable. The remaining 957,508 options have
a weighted average remaining contractual life of approximately 7.7 years.
(15) RETIREMENT AND SAVINGS 401(k) PLAN AND TRUST
The Company's Retirement and Savings 401(k) Plan and Trust (the "Plan")
became effective April 1, 1991. The Plan is a qualified profit-sharing plan with
a cash or deferred compensation arrangement and discretionary matching
contributions. Under the Plan, eligible employees may elect to contribute to the
Plan by salary deferrals up to an annual limit, which is the lesser of 20
percent of a participant's annual compensation or the maximum allowed by law,
and the Company may contribute matching amounts as provided by the Plan. Salary
deferrals and matching contributions are vested immediately. The Company's
matching expense, contributed in the form of the Company's common stock, was
$251,000, $200,000, and $135,000 for 1997, 1996, and 1995, respectively.
The Company may elect to make additional contributions to the Plan,
from its current or accumulated net profits, in the form of a profit sharing
contribution. This discretionary contribution will be made for all eligible
participants regardless of whether such participants make any salary deferrals
for that plan year. Profit sharing contributions are vested ratably over a five
year period. From inception of the Plan, the Company has not made a profit
sharing contribution.
The Plan provides for an overall limitation with respect to the amount
of contributions (including company match, if any) which can be allocated to any
participant in any plan year. This limitation is the lesser of 25 percent of a
participant's annual compensation or the maximum allowed by law.
(16) RELATED-PARTY TRANSACTIONS
Pursuant to the terms of the technology transfer agreement executed by
the Company and BioChem at the time of the Merger, the companies shared in the
expenses of researching and developing the subject vaccine technologies,
including expenses related to obtaining applicable patent rights. In January
1995, BioChem exercised its option under the technology transfer agreement to
terminate this joint arrangement. BioChem's portion of the expenses, including
reimbursements for its share of minimum annual royalties as discussed in Note
12, was $0, $2,200, and $20,000 in 1997, 1996, and 1995, respectively. In
addition, BioChem paid certain expenses for the development of the conjugate
vaccine technologies transferred to the Company in the Merger, subject to
reimbursement by the Company.
In the Merger, as discussed in Note 1, the Company and BioChem granted
to each other a one time demand registration right (with expenses to be paid by
the party exercising the registration right) and certain piggy-back registration
rights, through January 17, 1995. In connection with a proposed offering of the
Company's stock in 1994 by both BioChem and the Company, which offering was
later withdrawn at BioChem's request, BioChem's one-time demand registration
right was extended through January 17, 1998. In the first quarter of 1998, this
demand registration was further extended to January 17, 2001.
- 67 -
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference
to the discussion under the headings "Election of Directors," "Identification of
Senior Management" and "Security Ownership of Certain Beneficial Owners and
Management - Section 16(a) Beneficial Ownership Reporting Compliance" as set
forth in the Company's 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the discussion under the heading "Executive Compensation" and "Election of
Directors - Compensation of Directors" set forth in the Company's 1998 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item 12 is incorporated by reference
to the discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" set forth in the Company's 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference
to the discussion under the heading "Certain Transactions" set forth in the
Company's 1998 Proxy Statement.
- 68 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
a) DOCUMENTS FILED AS PART OF FORM 10-K.
The following documents are filed as part of this Annual Report on Form
10-K:
1. Financial Statements: PAGE
Report of Independent Public Accountants 46
Consolidated Balance Sheets as of
December 31, 1997 and 1996 47
Consolidated Statements of Operations for the
Years Ended December 31, 1997, 1996 and 1995 48
Consolidated Statements of Shareholders' Equity
(Deficit) for the Years Ended December 31, 1997,
1996 and 1995 49
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995 50
Notes to Consolidated Financial Statements 52
2. FINANCIAL STATEMENT SCHEDULES:
None Required.
3. EXHIBITS: See Exhibit Index on page 71.
b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1997; however, the Company did file the following two reports on
Form 8-K during January 1998:
(1) On January 9, 1998, the Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K under Item 5
updating the license application review process for the
Company's DTaP vaccine Certiva(TM) with the FDA.
(2) On January 29, 1998, the Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K under Item 5
reporting that the demand registration right held by BioChem
for its shares of Company Common Stock had been extended until
January 17, 2001.
- 69 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, North American Vaccine, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTH AMERICAN VACCINE, INC.
Dated: March 23, 1998 By: /s/ Sharon Mates
--------------------------------
Sharon Mates, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of North
American Vaccine, Inc. in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
/s/ Sharon Mates March 23, 1998
- ------------------------------------
Sharon Mates, Ph.D.
President
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Lawrence J. Hineline March 23, 1998
- ------------------------------------
Lawrence J. Hineline
Vice President-Finance
<TABLE>
<CAPTION>
A MAJORITY OF THE BOARD OF DIRECTORS:
<S> <C> <C> <C>
/s/ Francesco Bellini March 23, 1998 /s/ Rondi R. Grey March 2, 1998
- --------------------------------- ------------------------------
Francesco Bellini, Ph.D. Rondi R. Grey
/s/ Alain Cousineau March 23, 1998 /s/ Lyle Kasprick March 23, 1998
- --------------------------------- ------------------------------
Alain Cousineau Lyle Kasprick
/s/ Jonathan Deitcher March 2, 1998 /s/ Francois Legault March 23, 1998
- --------------------------------- ------------------------------
Jonathan Deitcher Francois Legault
/s/ Denis Dionne March 2, 1998 /s/ Sharon Mates March 23, 1998
- --------------------------------- ------------------------------
Denis Dionne Sharon Mates, Ph.D.
/s/ Neil W. Flanzraich March 23, 1998 /s/ Richard C. Pfenninger, Jr. March 23, 1998
- --------------------------------- ------------------------------
Neil W. Flanzraich Richard C. Pfenninger, Jr.
/s/ Phillip Frost March 23, 1998
- ---------------------------------
Phillip Frost, M.D.
</TABLE>
- 70 -
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
2.1 Master Agreement, dated October 25, 1989, among North American Vaccine,
Inc. ("NAV"), American Vaccine Corporation ("American Vaccine") and IAF
BioChem International, Inc. ("BioChem"). (1)
2.2 Agreement and Plan of Merger, dated as of October 25, 1989, among NAV,
American Vaccine and NAVA Acquiring Corp. (1)
2.3 Share Purchase Agreement, dated January 17, 1990, between NAV and
BioChem. (1)
2.4 Technology Transfer Agreement, dated January 17, 1990, between NAV and
BioChem. (1)
2.5 Amendment to Share Purchase Agreement dated as of January 8, 1998 between
NAV and BioChem. (2)
3.1 Articles of Incorporation of NAV, as amended. (1)(6)
3.2 Restated Bylaws of NAV. (3)
9.1 Shareholders' Agreement, dated January 17, 1990, among BioChem, Phillip
Frost, M.D., IVAX Corporation ("IVAX") and Frost-Nevada, Limited
Partnership ("Frost-Nevada"). (1)
10.1 License Agreement, dated July 27, 1987, between Canadian Patents and
Development Limited ("CPDL") and BioChem [with certain confidential
information deleted therefrom]. (1)
10.2 License Agreement, dated June 27, 1988, between CPDL and BioChem [with
certain confidential information deleted therefrom]. (1)
10.3 Agreement, dated April 6, 1989, between AMVAX, Inc. ("AMVAX") and the
National Institute of Child Health and Human Development ("NICHD"). (1)
10.4 License Agreement, dated March 25, 1988, between National Technical
Information Service ("NTIS") and Selcore Laboratories, Inc., predecessor
to AMVAX ("Selcore") [with certain confidential information deleted
therefrom]. (1)
10.5 Second Amended and Restated Patent License Agreement, dated March 12,
1992, between Ronald D. Sekura, Ph.D., and AMVAX [with certain
confidential information deleted therefrom]. (6)
10.6* North American Vaccine, Inc. Share Option Plan, as amended. (8)
10.9 Form of Indemnification Agreement among NAV, American Vaccine, IVAX,
Frost-Nevada and Ronald D. Sekura, Ph.D. (1)
10.12 Lease Agreement dated December 31, 1987, as amended, between Selcore and
Indian Creek Holding Associates Limited Partnership. (1)
- 71 -
<PAGE>
Exhibit
No. Description
10.13 Modification No. 11 to Contract with NICHD dated January 31, 1991 [with
certain confidential information deleted therefrom]. (4)
10.14 Supply Agreement between AMVAX and Statens Seruminstitut dated March 26,
1991 [with certain confidential information deleted therefrom]. (4)
10.16 Supply Agreement between AMVAX and Statens Seruminstitut dated March 26,
1991 [with certain confidential information deleted therefrom]. (4)
10.17 Research, Development and License Agreement between AMVAX and Statens
Seruminstitut dated March 26, 1991 [with certain confidential information
deleted therefrom]. (4)
10.18* Non-Employee Director and Senior Executive Stock Option Plan, as amended.
(8)
10.19 Modification No. 12 to Contract with NICHD dated April 1, 1992 [with
certain confidential information deleted therefrom]. (7)
10.20 Contract dated April 9, 1992 with NICHD [with certain confidential
information deleted therefrom]. (7)
10.21 Modification No. 13 to Contract with NICHD dated September 24, 1992 [with
certain confidential information deleted therefrom]. (8)
10.22 Amended and restated master agreement dated June 20, 1994 among NAV,
BioChem, IVAX, D&N Holding Company, Frost-Nevada and Phillip Frost. (10)
10.23 Share exchange agreement dated April 20, 1994 between NAV and BioChem.
(9)
10.25* North American Vaccine, Inc. 1995 Share Option Plan. (11)
10.26* North American Vaccine, Inc. 1995 Non-Employee Director and Senior
Executive Stock Option Plan. (12)
10.27 Clinical Development Agreement dated December 22, 1995 between NAV and
Pasteur Merieux Serums et Vaccins ("PMSV") [with certain confidential
information deleted therefrom]. (13)
10.28 License Agreement dated December 22, 1995 between NAV and PMSV [with
certain confidential information deleted therefrom]. (13)
10.29 Indenture dated May 7, 1996 between NAV and Marine Midland Bank. (14)
10.30 Registration Rights Agreement dated May 1, 1996 between NAV, Goldman,
Sachs & Co. and UBS Securities LLC. (14)
10.32 Stock Purchase Agreement dated October 11, 1996 between Abbott
Laboratories and NAV. (15)
- 72 -
<PAGE>
Exhibit
No. Description
10.33* Assets Purchase Agreement dated October 17, 1996 among NAV, Cephalon
Property Management, Inc. ("CPMI") and Cephalon, Inc. [with certain
confidential information deleted therefrom]. (15)
10.34 Assignment and Assumption of Leases dated November 12, 1996 between CPMI
and NAV. (16)
10.35 Master Agreement dated November 1, 1996 between NAV and General Electric
Capital Corporation [with certain confidential information deleted
therefrom]. (16)
10.36* North American Vaccine, Inc. 1997 Share Option Plan.
21 Subsidiaries. (5)
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
- ------------------
* Management contract or compensatory plan or arrangement.
(1) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form S-4 Registration Statement
(File No. 33-31512) filed with the SEC and declared effective on January
24, 1990.
(2) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Current Report on Form 8-K filed
with the SEC on January 29, 1998 (File No. 1-10451).
(3) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-Q Quarterly Report for the
Quarter Ended June 30, 1990 (File No. 1-10451).
(4) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-K Annual Report for the
Year Ended December 31, 1990 (File No. 1-10451).
(5) This exhibit is incorporated herein by this reference to Exhibit 22 in
the Company's Form 10-K Annual Report for the Year Ended December 31,
1990 (File No. 1-10451).
(6) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-K Annual Report for the
Year Ended December 31, 1991 (File No. 1-10451).
(7) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-Q Quarterly Report for the
Quarter Ended March 31, 1992 (File No. 1-10451).
(8) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-K Annual Report for the
Year Ended December 31, 1992 (File No. 1-10451).
(9) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-Q Quarterly Report for the
Quarter Ended March 31, 1994 (File No. 1-10451).
- 73 -
<PAGE>
(10) This exhibit is incorporated herein by this reference to Exhibit 99.1 in
the Company's Registration Statement on Form S-3 (Registration No.
33-78002) filed with the SEC and withdrawn from registration on November
23, 1994.
(11) This exhibit is incorporated herein by this reference to Exhibit 4.1 in
the Company's Registration Statement on Form S-8 (Registration No.
33-80479) filed with the SEC and effective as of December 15, 1995.
(12) This exhibit is incorporated herein by this reference to Exhibit 4.2 in
the Company's Registration Statement on Form S-8 (Registration No.
33-80479) filed with the SEC and effective as of December 15, 1995.
(13) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-K Annual Report for the
Year Ended December 31, 1995 (File No. 1-10451).
(14) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-Q Quarterly Report for the
Quarter Ended March 31, 1996 (File No. 1-10451).
(15) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-Q Quarterly Report for the
Quarter Ended September 30, 1996 (File No. 1-10451).
(16) This exhibit is incorporated herein by this reference to the
corresponding exhibit in the Company's Form 10-K Annual Report for the
Year Ended December 31, 1996 (File No. 1-10451).
- 74 -
EXHIBIT 10.36
NORTH AMERICAN VACCINE, INC.
1997 SHARE OPTION PLAN
1. PURPOSES. The purposes of this 1997 Share Option Plan (the "Plan")
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to the Employees of
the Company or its Subsidiaries or Parent, as well as to directors and other
individuals who perform services for the Company or its Subsidiaries or Parent,
and to promote the success of the Company's business. Options granted hereunder
may be either Incentive Stock Options or Nonqualified Stock Options, at the
discretion of the Committee and as reflected in the terms of the written Option
agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
all rules and regulations promulgated thereunder, as each of the statute, rules
and regulations may be amended from time to time.
"Common Shares" shall mean the common shares, no par value, of the
Company.
"Company" shall mean North American Vaccine, Inc., a Canadian
corporation.
"Committee" shall mean the committee appointed by the Company's Board
of Directors in accordance with Section 4(a) of the Plan.
"Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Service as an Employee
shall not be considered interrupted for purposes of the Plan, in the case of
sick leave, military leave, or any other personal, family and medical leave
permitted and duly approved in accordance with the Company's written policies,
as well as any other bona fide leave of absence approved by the Committee.
"Employee" shall mean any person, other than a resident of Canada, who
is employed by the Company or any Parent or Subsidiary. The payment of a
director's fee by the Company shall not be sufficient to constitute "employment"
by the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" of a Common Share shall mean, as of any given date,
the closing sales price of a Common Share on such date on the principal national
securities exchange on which the Common Shares are then traded or, if the Common
Shares are not then traded on a national securities exchange, the average of the
high and low trading prices of the Common Shares on such date as reported on the
Nasdaq; provided, however, that, if there were no sales reported as of such
date, Fair Market Value shall be computed as of the last date preceding such
date on which a sale was reported; provided, further, that, if any such exchange
or quotation system is closed on any day on which Fair Market Value is to be
determined, Fair Market Value shall be determined as of the first date
immediately preceding such date on which such exchange or quotation system was
open for trading. In the event the Common Shares are not admitted to trade on a
securities exchange or quoted on Nasdaq, the Fair Market Value of a Common Share
as of any given date shall be as determined in good faith by the Committee.
<PAGE>
"Incentive Stock Option" shall mean a share option intended to qualify
as an "incentive stock option" within the meaning of Section 422 of the Code.
"Nonqualified Stock Option" shall mean a share option not intended to
qualify as an "incentive stock option" within the meaning of Section 422 of the
Code.
"Option" shall mean an option to purchase Common Shares granted
pursuant to the Plan.
"Optioned Shares" shall mean the Common Shares subject to an Option.
"Optionee" shall mean the recipient of an Option.
"Parent" shall mean a "parent corporation" of the Company, whether now
or hereafter existing, as defined in Section 424(e) of the Code.
"Rule 16b-3" shall mean Rule 16b-3 promulgated by the U.S. Securities
and Exchange Commission under the Exchange Act or any successor rule.
"Share" shall mean a Common Share, as adjusted in accordance with
Article 12 of the Plan.
"Subsidiary" shall mean a "subsidiary corporation" of the Company,
whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. SHARES. Subject to the provisions of Article 12 of the Plan, the
maximum aggregate number of Shares that may be issued under the Plan is
5,000,000 (any or all of which may be Incentive Stock Options). The Optioned
Shares shall be newly issued or treasury Common Shares. The grant of an Option
pursuant to the Plan shall reduce the number of Shares that thereafter may be
available for future grants under the Plan; provided, however, that if an Option
should expire, terminate or otherwise become unexercisable for any reason
without having been exercised in full, the unpurchased Shares that were subject
thereto shall, unless the Plan shall have been terminated, become available for
further grant under the Plan. Exercise of an Option in any manner shall result
in a decrease in a number of Shares that thereafter may be available for
purchase under the Option by the number of Shares as to which the Option is
exercised.
4. ADMINISTRATION.
(a) COMMITTEE. The Plan at all times shall be administered by a
Committee appointed by the Company's Board of Directors. The Committee shall
consist of not less than two members of the Company's Board of Directors, each
of whom is a "non-employee director" as defined in Rule 16b-3 and an "outside
director" as defined for purposes of Section 162(m) of the Code.
(b) POWERS OF THE COMMITTEE. Subject to the provisions of the Plan, the
Committee shall have the authority, in its discretion: (i) to grant Incentive
Stock Options or Nonqualified Stock Options; (ii) to determine the Fair Market
Value of the Common Shares; (iii) to establish the duration of each Option
granted; (iv) to determine the exercise price per Share of the Options to be
- 2 -
<PAGE>
granted; (v) to determine the persons to whom, and the time or times at which,
Options shall be granted and the number of Shares to be represented by each
Option; (vi) to determine the vesting schedule of Options to be granted and to
accelerate the vesting of any Option already granted; (vii) to determine whether
the exercise price of or taxes relating to an Option may be paid in already
owned Shares and/or Shares then issuable upon the exercise of the Option; (viii)
to prescribe, amend and rescind rules and regulations relating to the Plan; (ix)
to determine the terms and provisions of each Option granted under the Plan
(which need not be identical); (x) to accelerate or defer the exercise date of
any Option; (xi) to waive or amend any and all restrictions and conditions of
any Options, including, without limitation, extending the term of any Option;
(xii) to authorize any person to execute on behalf of the Company any instrument
required to effectuate the grant of an Option previously granted by the
Committee; and (xiii) to interpret the Plan and make all other determinations
deemed necessary or advisable for the administration of the Plan.
(c) EFFECT OF THE COMMITTEE'S DECISION. All decisions, determinations
and interpretations of the Committee shall be final and binding on all
Optionees. No member of the Company's Board of Directors or the Committee shall
be liable for any action or determination made in good faith with respect to the
Plan or any Option agreement.
5. ELIGIBILITY. Incentive Stock Options may be granted only to
Employees. Nonqualified Stock Options may be granted to Employees, non-employee
directors and independent contractors and agents of the Company or any Parent or
Subsidiary; provided, however, that Options may not be granted under the Plan to
(i) a non-employee director if such grant does not comply with provisions of
Rule 16b-3, or (ii) any persons or entities that are Canadian residents. Any
person who has been granted an Option may, if he is otherwise eligible, be
granted an additional Option or Options. Subject to the provisions of Article 12
of the Plan, the maximum number of Shares with respect to which Options may be
granted under the Plan to any Employee in any calendar year is one percent (1%)
of the Common Shares issued and outstanding as of the beginning of such calendar
year.
Except as otherwise provided under the Code, to the extent that the
aggregate Fair Market Value of Common Shares for which Incentive Stock Options
(under all share option plans of the Company and of any Parent or Subsidiary)
are exercisable for the first time by an Employee during any calendar year
exceeds One Hundred Thousand U.S. Dollars (US$100,000), such Options shall be
treated as Nonqualified Stock Options. For purposes of this limitation, (a) the
Fair Market Value of Common Shares is determined as of the time the Option is
granted and (b) the limitation is applied by taking into account Options in the
order in which they were granted.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by
the Board of Directors of the Company; provided that, if the Plan is not
approved by the shareholders of the Company in accordance with Article 17 of the
Plan within twelve (12) months after the date of adoption by the Company's Board
of Directors, the Plan and any Options granted thereunder shall terminate and
become null and void, except to the extent that any Option agreement expressly
provides for the continuance of the Options granted thereby (as non-plan,
nonqualified options) notwithstanding the termination of the Plan. Unless sooner
terminated in accordance with Article 14 of the Plan, the Plan shall terminate
on December 9, 2007, except that the Plan and the Committee's authority
thereunder shall continue with respect to any Options then outstanding. After
such date, no further Options shall be granted under the Plan.
7. TERM OF OPTION. The term of each Option granted to an Employee shall
be ten (10) years from the date of grant thereof or such shorter time as may be
determined by the Committee and set forth in the Option agreement. In the case
of Options granted to individuals who are not Employees, the term of each Option
- 3 -
<PAGE>
shall be such term as may be determined by the Committee, not to exceed ten (10)
years. However, in the case of an Incentive Stock Option granted to an Employee
who, immediately before the Incentive Stock Option is granted, owns shares
representing more than ten percent (10%) of the combined voting power of all
classes of shares of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant thereof or
such shorter time as may be determined by the Committee and set forth in the
Option agreement.
8. EXERCISE PRICE AND CONSIDERATION.
(a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Committee,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option: (A) granted to an
Employee who, immediately before the grant of such Incentive Stock Option, owns
shares representing more than ten percent (10%) of the voting power of all
classes of shares of the Company or any Parent or Subsidiary, the per Share
exercise price shall be no less than one hundred ten percent (110%) of the Fair
Market Value per Share on the date of grant; and (B) granted to any other
Employee, the per Share exercise price shall be no less than the Fair Market
Value per Share on the date of grant.
(ii) In the case of a Nonqualified Stock Option, the per Share
exercise price shall be no less than the Fair Market Value per Share on the date
of grant.
(b) Notwithstanding Section 8(a) of the Plan, in the event the Company
substitutes an Option to replace a share option issued by another corporation in
connection with a corporate transaction, such as a merger, amalgamation,
consolidation, acquisition of property or stock, separation (including a
spin-off or other distribution of stock or property), reorganization (whether or
not such reorganization comes within the definition of such term in Section 368
of the Code) or partial or complete liquidation involving the Company and such
other corporation, the Committee may grant substituted Options under the
provisions of the Plan replacing old options granted under a plan of another
party to such transaction. The foregoing adjustments and manner of application
of the foregoing provisions shall be determined by the Committee in its sole
discretion (subject to the provisions of Section 424(a) of the Code in the case
of an Option that was intended to qualify as an Incentive Stock Option). Any
such adjustments may provide for the elimination of any fractional Common Shares
that might otherwise become subject to any Options.
(c) During the period when an Option is exercisable, the Option may be
exercised, in whole or in part, by giving written notice of exercise to the
Company (in form acceptable to the Company) specifying the number of Shares to
be purchased. Such notice shall be accompanied by payment in full of the
aggregate exercise price of the Shares to be purchased in cash, check
(including, without limitation, payment in accordance with a cashless exercise
program under which, if so instructed by the Optionee, Common Shares may be
issued directly to the Optionee's broker or dealer upon receipt of the purchase
price in cash from the broker or dealer) or such other form and in such other
manner as the Committee may accept. If and to the extent determined by the
Committee in its sole discretion at or after grant, payment in full or in part
may also be made in the form of Common Shares duly owned by the Optionee (and
for which the Optionee has good title, free and clear of any liens and
encumbrances) or by reduction in the number of Common Shares issuable upon such
exercise based, in each case, on the Fair Market Value of the Common Shares on
the date the Option is exercised. No Common Shares shall be issued until
payment, as provided herein, therefor has been made.
9. EXERCISE OF OPTION.
- 4 -
<PAGE>
(a) PROCEDURE FOR EXERCISE. Any Option granted hereunder shall be
exercisable at such times and under such conditions as determined by the
Committee, including performance criteria with respect to the Company and/or the
Optionee, and as shall be permissible under the terms of the Plan. An Option may
not be exercised for a fraction of a Share. An Option shall be deemed to be
exercised when written notice of such exercise (in a form acceptable to the
Company) has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Committee, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
(b) RIGHTS AS A SHAREHOLDER. Until the issuance, which in no event
(except as provided in Article 15 of the Plan) will be delayed more than thirty
(30) days from the date that the Company receives payment in full after proper
exercise of the Option, of the share certificate evidencing the Shares to be
issued (as evidenced by the appropriate entry on the books of the Company or of
a duly authorized transfer agent of the Company), no right to vote or to receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Shares, notwithstanding the exercise of the Option. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date the share certificate is issued, except as provided in the Plan.
10. TERMINATION OF EMPLOYMENT.
(a) TERMINATION OF STATUS AS AN EMPLOYEE. If any Employee ceases to be
in Continuous Status as an Employee, other than (i) by reason of retirement,
(ii) death, or (iii) as a result of a termination by the Company for willful or
gross misconduct, including, without limitation, breach of fiduciary duty, as
determined by the Committee (whose determination shall be final, binding and
conclusive), any Option held by such Employee shall be exercisable within three
(3) months after the date he ceases to be in Continuous Status as an Employee
(or such longer period as the Committee shall determine, in its sole and
absolute discretion) to the extent the Employee was entitled to exercise such
Option as of the date of his termination of employment, unless the Committee
provides for a shorter or longer period. Notwithstanding the foregoing, in
granting Incentive Stock Options, the Committee, in its sole discretion, may
elect to limit the period that an Employee may exercise an Option following his
termination to the periods prescribed by Section 422 of the Code (or any shorter
periods as the Committee shall determine).
(b) RETIREMENT OF OPTIONEE. If any Employee ceases to be in Continuous
Status as an Employee by reason of such Employee's retirement, any Option held
by such Employee shall be exercisable within thirty-six (36) months after the
date he ceases to be in Continuous Status as an Employee to the extent that he
was entitled to exercise such Option as of the date of his retirement, unless
the Committee provides for a shorter or longer period. For purposes of the Plan,
"retirement" means voluntary termination of services as an Employee at or after
age sixty-five (65) other than as a result of willful or gross misconduct,
unless determined otherwise by the Committee.
(c) TERMINATION FOR MISCONDUCT. If any Employee ceases to be in
Continuous Status as an Employee as a result of a termination by the Company for
willful or gross misconduct, including, without limitation, breach of fiduciary
duty (the Committee's determination in this regard shall be final, binding and
conclusive), any and all Options held by such Employee shall terminate
immediately and automatically at the time of his termination as an Employee,
unless the Committee provides for an earlier or later time for the termination
of such Option(s), and such Option(s) will not be exercisable after such time of
termination, unless otherwise determined by the Committee.
- 5 -
<PAGE>
(d) DEATH OF OPTIONEE. Subject to the provisions of the Plan, any
Option held by an Optionee at the time of his death may be exercised
subsequently by the legal representative of the Optionee's estate during the
remaining term of the Option, but only to the extent the Optionee was entitled
to exercise such Option as of the date of his death, unless the Committee
provides for a longer or shorter period. In the event of the death of an
Optionee during the final three (3) months of the time period specified in
Section 10(a) or 10(b), as applicable, the Option may be exercised, at any time
within three (3) months following the date of his death, by the Optionee's
estate or by a person or persons who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent the Optionee was entitled to
exercise such Option as of the date of his death, unless the Committee provides
for a longer or shorter period.
(e) EXPIRATION OF OPTIONS. None of the events described above in this
Article 10 shall extend the period of exercisability of the Option beyond the
expiration date thereof. To the extent that an Optionee was not entitled to
exercise an Option on the date he ceased to be in Continuous Status as an
Employee or the date of the Optionee's death, or if he does not exercise such
Option (which he was entitled to exercise) within the time period specified in
this Article 10, the Option shall terminate and become null and void.
Notwithstanding the provisions of Section 10(a), 10(b) or 10(d) of the Plan, no
Options shall be exercisable after an Optionee ceases to be in Continuous Status
as an Employee in the event the Optionee shall have, during the time period in
which his Options are exercisable, engaged in deliberate action that, as
determined by the Committee in its sole discretion (whose determination shall be
final, binding and conclusive), causes substantial harm to the interests of the
Company or constitutes a breach of any obligation of the Optionee to the
Company. In such event, the Optionee shall forfeit all rights to any unexercised
Option as of the date of such deliberate action and all such unexercised Options
shall terminate immediately and automatically at the time of such deliberate
action.
(f) NON-EMPLOYEE DIRECTORS, INDEPENDENT CONTRACTORS AND AGENTS. The
Committee shall have the authority to determine in its sole discretion (whose
determination shall be final, binding and conclusive) the ability of an Optionee
who is not an Employee to exercise an Option following termination of his or her
relationship with the Company and its Parent and Subsidiaries.
11. NON-TRANSFERABILITY OF OPTIONS. An Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined in the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder,
and, except with respect to a qualified domestic relations order as aforesaid,
may be exercised, during the lifetime of the Optionee, only by the Optionee or
his legal representative.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CHANGE IN CONTROL;
DISSOLUTION.
(a) Subject to any required action by the shareholders of the Company,
each of (i) the number of Common Shares covered by each outstanding Option, (ii)
the number of Common Shares that have been authorized for issuance under the
Plan but as to which no Options have yet been granted or that have been returned
to the Plan upon cancellation, termination or expiration of an Option, (iii) the
exercise price per Share covered by each such outstanding Option, and (iv) the
maximum number of Shares with respect to which Options may be granted to any
Employee in any calendar year, shall be proportionately adjusted for any
increase or decrease in the number of issued Common Shares resulting from a
- 6 -
<PAGE>
stock split or the payment of a stock dividend with respect to the Common Shares
or any other increase or decrease in the number of issued Common Shares effected
without receipt of consideration by the Company; provided, however, that (A)
each such adjustment with respect to an Incentive Stock Option shall comply with
the rules of Section 424(a) of the Code (or any successor provision) and (B) in
no event shall any adjustment be made that would render any Incentive Stock
Option granted hereunder to be treated other than as an "incentive stock option"
as defined in Section 422 of the Code; and provided further, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Committee, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of any class, or securities convertible into shares of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or exercise price of Common Shares subject to an Option.
(b) In the event of a dissolution or liquidation of the Company, all
outstanding Options will terminate upon the consummation of such action, unless
otherwise provided by the Committee.
(c) The exercisability of each Option shall be automatically
accelerated so that each such Option outstanding shall, immediately prior to the
specified effective date of any of the following events, become fully
exercisable with respect to the total number of Shares subject to such Option
and may be exercisable for all or any portion of such Shares, in the event that:
(i) any person (as defined for purposes of Section 13(d) and 14(d)
of the Exchange Act, but excluding the Company and any of its wholly-owned
subsidiaries) acquires direct or indirect ownership of fifty percent (50%) or
more of the combined voting power of the then outstanding securities of the
Company as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise;
(ii) any election has occurred of persons to the Board of Directors
of the Company that causes two-thirds of the Company's Board of Directors to
consist of persons other than (A) persons who were members of the Company's
Board of Directors on January 1, 1997 and (B) persons who were nominated by the
Company's Board of Directors for election as members of the Company's Board of
Directors at a time when two-thirds of the Company's Board of Directors
consisted of persons who were members of the Company's Board of Directors on
January 1, 1997; provided, however, that any person nominated for election by
the Board of Directors of the Company at least two-thirds of whom constituted
persons described in clauses (A) and/or (B) above or by persons who were
themselves nominated by such Board shall, for this purpose, be deemed to have
been nominated by a Board composed of persons described in clause (A) above; or
(iii) the shareholders of the Company approve (A) any statutory
consolidation, merger or amalgamation of the Company in which the Company is not
the surviving corporation (other than a merger or amalgamation of the Company in
which the holders of Common Shares immediately prior to the merger or
amalgamation have the same proportionate ownership of the surviving corporation
immediately after the merger or amalgamation), or (B) any sale, lease, exchange
or other transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company to an entity that is not
a wholly-owned subsidiary of the Company.
(d) In the event of an acquisition by the Company of another
corporation where the Company assumes under the Plan outstanding stock options
or similar obligations of such corporation, the number of Shares available under
the Plan shall be appropriately increased to reflect the number of shares under
such options or other obligations assumed.
- 7 -
<PAGE>
(e) Adjustments and determinations under this Article 12 shall be made
by the Committee, upon the advice of counsel, whose decisions shall be final,
binding and conclusive.
13. TIME FOR GRANTING OPTIONS. The date of grant of an Option shall be
the date on which the Committee makes the determination granting such Option or
such later date as the Committee may specify. Notice of the determination shall
be given to each Employee to whom an Option is so granted within a reasonable
time after the date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN AND OPTIONS. Subject to the
provisions of this Article 14, the Plan may be amended, suspended, discontinued
or terminated at any time by the Committee without the approval of the Company's
shareholders in such respects as the Committee may deem advisable so that the
Plan and/or Options may conform to any changes in the law or in any other
respect which the Committee may deem to be in the best interests of the Company,
other than any amendments required to be approved by shareholders under (i) the
Canada Business Corporation Act, (ii) the rules of the securities exchange or
Nasdaq on which the Common Shares are listed, or (iii) Section 162(m) of the
Code, or any other requirement of applicable law or regulation. No Option may be
granted during any suspension or discontinuance of the Plan or after its
termination. Amendments to the Plan also shall be subject to any approvals
required under applicable laws or regulations or under the applicable rules of
any stock exchange or Nasdaq on which the Common Shares are listed. In addition,
subject to the provisions of this Article 14, the Committee may waive any
conditions or rights under, or amend, suspend, discontinue or terminate, any
Option and/or the terms of any corresponding Option agreement; provided, however
that the Committee may amend any Option and/or the terms of any corresponding
Option agreement only to the extent that the Option and/or such Option
agreement, as either may be amended, could have been granted pursuant to the
Plan with such amended terms. No amendment of an Option shall be deemed to be
the grant of a new Option for purposes of the Plan. In addition, no amendment,
suspension, discontinuation or termination of the Plan or any Option shall,
without an Optionee's consent, impair any of such Optionee's rights under any
Option theretofore granted to such Optionee.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Shares shall not be issued pursuant to the exercise of an Option
unless the exercise of such Option and the issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Canadian Business Corporations Act, the Securities Act
(Quebec), the Securities Act of 1933, as amended, the Exchange Act, the rules
and regulations promulgated thereunder, and the requirements of any stock
exchange upon which the Shares may then be listed or Nasdaq, and shall be
further subject to the advice of counsel for the Company with respect to such
compliance. As a condition to the exercise of an Option, the Company may require
the person exercising such Option to complete a questionnaire in a form
acceptable to the Company and to make certain representations and warranties
required or desirable (in the opinion of the Company or its counsel), including,
without limitation, any representations and warranties required by law, in the
opinion of counsel, regarding investment intent. If, in the opinion of counsel
for the Company, such a representation is required by any of the aforementioned
relevant provisions of laws, certificates representing Shares issued upon
exercise of the Option shall bear a legend prohibiting transfer of such Shares
unless, in the opinion of such counsel, such transfer is not inconsistent with
any of the requirements of any applicable Canadian and United States securities
laws.
(b) Inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
- 8 -
<PAGE>
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
(c) In the event that any Option is exercised by the executors,
administrators, legatees or distributees of the estate of a deceased Optionee,
the Company shall be under no obligation to issue stock thereunder unless and
until the Company is satisfied that the person or persons exercising the Option
are the duly appointed legal representatives of the deceased Optionee's estate
or the proper legatees or distributees thereof.
16. OPTION AGREEMENTS. Options shall be evidenced by written Option
agreements in such form as the Committee shall approve from time to time.
17. SHAREHOLDER APPROVAL. The effectiveness of the Plan shall be
subject to approval by the shareholders of the Company, in a separate vote,
within twelve (12) months after the date the Plan is adopted. Such shareholder
approval shall be obtained, at a duly held shareholders' meeting, by the
affirmative vote of a majority of the votes actually cast, in person or by
proxy, at such meeting on a separate proposal to approve the Plan. All Options
granted prior to shareholder approval are granted conditional upon shareholder
approval of the Plan, except to the extent that any Option agreement expressly
provides for the continuance of the Options granted thereby (as non-plan,
nonqualified options) notwithstanding the termination of the Plan.
18. INDEMNIFICATION OF COMMITTEE MEMBERS. In addition to such other
rights of indemnification as they may have members of the Company's Board of
Directors, the members of the Committee shall be, to the extent permitted by
applicable law, indemnified by the Company against, and the Company shall
advance, the reasonable expenses, including attorneys' fees actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
to the extent required by and in the manner provided by the Articles of
Incorporation and Bylaws of the Company), or paid by them in satisfaction of a
judgment in any such action, suit or proceeding, except in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
Committee member did not act in good faith and in a manner he reasonably
believed to be in the best interests of the Company. Within sixty (60) days
after institution of any such action, suit or proceeding, a Committee member
shall notify the Company of the institution of the suit and grant to the Company
in writing the opportunity, at its own expense, to handle and defend the same.
Failure to provide such notice and grant shall, at the option of the Company,
relieve the Company of the indemnification obligations set forth in this Article
18.
19. OTHER COMPENSATION PLANS. The adoption of the Plan shall not affect
any other share option or incentive or other compensation plans in effect for
the Company or any Subsidiary or Parent, nor shall the Plan preclude the Company
from establishing any other forms of incentive or other compensation for
employees and directors of the Company or any Subsidiary or Parent.
20. HEADINGS. Headings of Articles and Sections hereof are inserted for
convenience and reference; they constitute no part of the Plan.
21. RESERVATION OF SHARES. The Company, during the term of the Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
- 9 -
<PAGE>
22. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of Common Shares pursuant to Options will be used for general corporate
purposes.
23. UNFUNDED PLAN. The Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund or to make any other
segregation of assets to assure the issuance of Shares under the Plan or the
payment of monies under the Plan and the issuance of Shares and the payment of
monies to Optionees under the Plan shall be subordinate to the claims of the
Company's general creditors.
24. TAXES. The Company shall be entitled to withhold (or secure payment
from the Optionee in lieu of withholding) the amount of any withholding or other
tax required by law to be withheld or paid by the Company with respect to any
Shares issuable under such Optionee's Option, or upon a disqualifying
disposition of Shares received pursuant to the exercise of an Incentive Stock
Option, and the Company may defer issuance of Shares upon the grant or exercise
of an Option unless indemnified to its satisfaction against any liability for
any such tax. The amount of such withholding or tax payment shall be determined
by the Company and shall be payable by the Optionee at such time as the Company
determines. The Committee may prescribe in each Option agreement one or more
methods by which the Optionee will be permitted to satisfy his or her
withholding or tax obligation, which methods may include, without limitation,
(i) the payment of cash by the Optionee to the Company, (ii) the payment in
Common Shares already owned by Optionee, based on the Fair Market Value of such
Common Shares on the date that the withholding or tax obligation is to be
determined, to satisfy such withholding or tax requirements, and (iii) the
withholding from the Option, at the appropriate time, of a number of Shares
sufficient, based upon the Fair Market Value of such Shares on the date that the
withholding or tax obligation is to be determined, to satisfy such withholding
or tax requirements.
25. INCENTIVE STOCK OPTIONS. In the case of any grant of an Option
intended to be an Incentive Stock Option, whenever possible, each provision in
the Plan and in any related Option agreement (other than those relating to the
exercise of Options following termination of employment) shall be interpreted in
such a manner as to entitle the Optionee to the tax treatment afforded by
Section 422 of the Code and, if any such provision of the Plan or such Option
agreement shall be held not to comply with requirements necessary to entitle
such Option to such tax treatment, then (a) such provision shall be deemed to
have contained from the outset such language as shall be necessary to entitle
the Option to the tax treatment afforded under Section 422 of the Code, and (b)
all other provisions of the Plan and the Option agreement relating to such
Option shall remain in full force and effect. If any Option agreement covering
an Option designated by the Committee to be an Incentive Stock Option shall not
explicitly include any terms required to entitle such Incentive Stock Option to
the tax treatment afforded by Section 422 of the Code (other than those relating
to the exercise of Options following termination of employment), all such terms
shall be deemed implicit in the designation of such Option as an Incentive Stock
Option and the Option shall be deemed to have been granted subject to all such
terms.
26. NO RIGHT TO OPTION; NO RIGHT TO EMPLOYMENT. No employee or other
person shall have any claim or right to be granted an Option. The Plan shall not
confer upon any Optionee any right with respect to continuation of employment by
the Company or its Subsidiaries or Parent, nor shall it interfere in any way
with his right or the right of the Company, its Subsidiaries or Parent to
terminate his employment at any time.
27. ACCEPTANCE OF PLAN. By accepting any Option or other benefit under
the Plan, each Optionee, for himself and for his successors, assigns, heirs,
beneficiaries and personal and legal representatives, shall be conclusively
deemed to have indicated his acceptance and ratification of, and consent to, any
- 10 -
<PAGE>
action taken under the Plan by the Company, the Committee and the Company's
Board of Directors.
28. OPTIONS NOT INCLUDABLE FOR BENEFIT PURPOSES. Income recognized by
an Optionee pursuant to the provisions of the Plan shall not be included in the
determination of benefits under any employee pension benefit plan (as such term
is defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder) or group insurance or other benefit
plans applicable to the Optionee that are maintained by the Company or any of
its Subsidiaries, except as may be provided under the terms of such plans or
determined by resolution of the Company's Board of Directors.
29. GOVERNING LAW. The Plan and all determinations made and actions
taken pursuant to the Plan shall be governed by the laws of the State of
Delaware, except that the issuance of Shares by the Company upon the exercise of
Options shall be governed by the Canada Business Corporations Act.
30. NO STRICT CONSTRUCTION. No rule of strict construction shall be
implied against the Company, the Committee, or any other person in the
interpretation of any of the terms of the Plan, any Option granted under the
Plan or any rule or procedure established by the Committee.
31. SEVERABILITY. Whenever possible, each provision in the Plan and
every Option at any time granted under the Plan shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of the Plan or any Option at any time granted under the Plan shall be held to be
prohibited by or invalid under applicable law, then (a) such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law and (b) all other provisions of
the Plan and every other Option at any time granted under the Plan shall remain
in full force and effect.
- 11 -
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Annual Report on Form 10-K into (i) the Company's
previously filed Registration Statements on Form S-8, File Nos. 33-37325,
33-39416, 33-48752, 33-48753 and 33-80479, and (ii) the Company's previously
filed Registration Statement on Form S-3, File No. 333-8851.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Washington, D.C.
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 45,502
<SECURITIES> 843
<RECEIVABLES> 324
<ALLOWANCES> 0
<INVENTORY> 2,730
<CURRENT-ASSETS> 49,171
<PP&E> 58,284
<DEPRECIATION> 26,856
<TOTAL-ASSETS> 84,508
<CURRENT-LIABILITIES> 13,999
<BONDS> 83,734
0
6,538
<COMMON> 78,509
<OTHER-SE> (102,394)
<TOTAL-LIABILITY-AND-EQUITY> 84,508
<SALES> 1,699
<TOTAL-REVENUES> 9,700
<CGS> 0
<TOTAL-COSTS> 49,908
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,772
<INCOME-PRETAX> (43,840)
<INCOME-TAX> 0
<INCOME-CONTINUING> (43,840)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,840)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
