UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-10451
NORTH AMERICAN VACCINE, INC.
----------------------------
(Exact name of registrant as specified in its charter)
CANADA 98-0121241
------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10150 OLD COLUMBIA ROAD, COLUMBIA, MARYLAND 21046
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 309-7100
Former Address: 12103 Indian Creek Court, Beltsville, Maryland 20705
- ---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE, OUTSTANDING AS OF NOVEMBER 4, 1998 -- 32,208,351
SHARES
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TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Consolidated Balance Sheets..................................... 4
Consolidated Statements of Operations........................... 5
Consolidated Statements of Shareholders' Deficit................ 6
Consolidated Statements of Cash Flows........................... 7
Notes to Condensed Consolidated Financial Statements............ 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 25
PART II. OTHER INFORMATION
Item 5. Other Information............................................... 25
Item 6. Exhibits and Reports on Form 8-K................................ 27
SIGNATURES .............................................................. 28
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited, condensed consolidated financial statements of North
American Vaccine, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
This report should be read in conjunction with the Company's Annual Report on
Form 10-K filed for the year ended December 31, 1997. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial information for the interim
periods reported have been made. Results of operations for the three and nine
months ended September 30, 1998, will not necessarily be indicative of the
results for the entire fiscal year ending December 31, 1998.
3
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) September 30, December 31,
1998 1997
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,410 $ 45,502
Accounts receivable 2,505 324
Inventory 3,120 2,730
Prepaid expenses and other current assets 922 615
--------- ---------
Total current assets 15,957 49,171
Property, plant and equipment, net 26,631 31,428
Investment in affiliate, at market 1,093 843
Deferred financing costs, net 2,237 2,603
Cash restricted for lease obligation 5,271 --
Other assets 646 463
--------- ---------
TOTAL ASSETS $ 51,835 $ 84,508
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 3,044 $ 3,343
Deferred revenue 2,717 3,999
Obligation under capital lease, current portion 1,712 1,593
Other current liabilities 7,033 5,064
--------- ---------
Total current liabilities 14,506 13,999
6.50% Convertible subordinated notes, due May 1, 2003 83,734 83,734
Obligation under capital lease, net of current portion 2,811 4,110
Deferred rent credit, net of current portion 46 12
--------- ---------
TOTAL LIABILITIES 101,097 101,855
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock, no par value; unlimited shares authorized- Series A,
convertible; issued and outstanding 2,000,000 shares;
entitled to Can $2.50 per share in liquidation 6,538 6,538
Common stock, no par value; unlimited shares authorized; issued
32,208,351 shares at September 30, 1998 and 31,936,539 shares at
December 31, 1997 80,742 78,509
Cumulative comprehensive income excluded from net loss 465 215
Accumulated deficit (135,779) (102,609)
Loan receivable from former officer (1,228) --
--------- ---------
Total shareholders' deficit (49,262) (17,347)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 51,835 $ 84,508
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Marketing, research and development agreements $ 2,563 $ 6,485 $ 4,282 $ 7,710
Product sales 501 465 845 1,378
-------- -------- -------- --------
Total revenues 3,064 6,950 5,127 9,088
-------- -------- -------- --------
OPERATING EXPENSES:
Production 5,108 5,234 14,274 13,868
Research and development 4,731 4,931 13,264 14,446
General and administrative 2,383 3,239 7,198 8,941
-------- -------- -------- --------
Total operating expenses 12,222 13,404 34,736 37,255
-------- -------- -------- --------
OPERATING LOSS (9,158) (6,454) (29,609) (28,167)
OTHER INCOME (EXPENSES):
Interest and dividend income 276 739 1,232 2,489
Interest expense (1,571) (1,685) (4,793) (5,077)
-------- -------- -------- --------
NET LOSS $(10,453) $ (7,400) $(33,170) $(30,755)
======== ======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.32) $ (0.23) $ (1.03) $ (0.97)
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 32,206 31,627 32,132 31,604
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
(UNAUDITED)
SERIES A CUMULATIVE TOTAL
CONVERTIBLE COMPREHENSIVE SHARE-
PREFERRED STOCK COMMON STOCK INCOME ACCUM- LOAN HOLDERS'
------------------------ ---------------------- EXCLUDED FROM ULATED TO EQUITY
SHARES AMOUNT SHARES AMOUNT NET LOSS DEFICIT OFFICER (DEFICIT)
---------- ------------- ------------- -------- -------------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 2,000 $ 6,538 31,937 $ 78,509 $ 215 $(102,609) $ -- $ (17,347)
Net loss -- -- -- -- -- (33,170) -- (33,170)
Increase in market
value of investment -- -- -- -- 250 -- -- 250
---------
Comprehensive income (32,920)
Exercises of stock
options -- -- 260 2,017 -- -- -- 2,017
Loan receivable from
former officer -- -- -- -- -- -- (1,228) (1,228)
Shares issued under
401(k) plan -- -- 11 216 -- -- -- 216
Balance,
--------- --------- --------- --------- --------- --------- --------- ---------
September 30, 1998 2,000 $ 6,538 32,208 $ 80,742 $ 465 $(135,779) $ (1,228) $ (49,262)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(33,170) $(30,755)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 6,117 8,211
Amortization and reduction of deferred financing costs 366 377
Contribution of common stock to 401(k) plan 216 173
Stock option compensation -- 1,313
Increase in other assets (183) (10)
Decrease in deferred rent (29) (67)
Cash flows (used in) provided by other working capital items (2,427) 6,317
-------- --------
Net cash used in operating activities (29,110) (14,441)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,320) (1,836)
-------- --------
Net cash used in investing activities (1,320) (1,836)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options, net 2,017 2,421
Loan to a former officer related to the purchase of common stock (1,228) --
Principal payments on capital lease obligation (1,180) (1,108)
Cash restricted for capital lease obligation (5,271) --
-------- --------
Net cash (used in) provided by financing activities (5,662) 1,313
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (36,092) (14,964)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,502 70,881
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,410 $ 55,917
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:
(Increase) decrease in :
Accounts receivable $(2,181) $ 3,698
Inventory (390) (641)
Prepaid expenses and other current assets (307) (273)
Increase (decrease) in :
Accounts payable (299) 78
Other current liabilities 750 3,455
------- -------
Net cash (used in) provided by other working capital items $(2,427) $ 6,317
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,105 $ 3,308
======= =======
Use of stock to exercise stock options $ 3,429 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
8
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
The Company is engaged in the research, development, production, and sale of
vaccines for the prevention of infectious diseases in children and adults. In
July 1998, the Company received marketing authorization from the U.S. Food and
Drug Administration ("FDA") to market its DTaP vaccine (Certiva(TM)) in the
United States for the prevention of diphtheria, tetanus, and pertussis (whooping
cough). Under a marketing agreement between the Company and Abbott Laboratories
("Abbott"), Abbott will market Certiva(TM) to private physicians and managed
care markets in the United States for immunization of infants and children.
Abbott began the launch of Certiva(TM) in October 1998. 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").
Previously, in 1996, regulatory approval for a European formulation of
Certiva(TM) was granted in Sweden, and regulatory approval of a combined
DTaP-IPV (polio) vaccine was granted in Denmark. In April 1997, regulatory
approval for the Company's monovalent acellular pertussis (aP) vaccine to
vaccinate children was also granted in Sweden, thereby expanding the market for
the Company's aP vaccine. In June 1998, the Company was advised that, under the
European mutual recognition procedure, the regulatory authorities in Germany,
Austria, Sweden and Finland agreed to recognize the marketing authorization
granted by Denmark for the DTaP-IPV vaccine. The mutual recognition procedure
now requires that each of these regulatory authorities, upon receipt of certain
prescribed information, issue the national marketing authorization for the
product. The Company has appointed Chiron Behring GmbH & Co. ("Chiron") to
market and distribute the DTaP-IPV product in Germany and Austria. Statens Serum
Institut, Copenhagen, Denmark, holds the product registrations and will market
and distribute the product in the Scandinavian, Baltic and other countries
comprising its territory.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF ACCOUNTING AND CURRENCY. The Company is a Canadian corporation
incorporated under the Canadian Business Corporations Act ("CBCA") on August 31,
1989. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in the United
States and are denominated in U.S. dollars, because the Company conducts the
majority of its transactions in this currency. The application of Canadian GAAP
would not result in material adjustments to the accompanying financial
statements except for the impact of the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 115. The effect of foreign currency
translation has been immaterial.
(b) PERVASIVENESS OF ESTIMATES. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
9
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affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from estimates.
(c) REVENUE RECOGNITION. Nonrefundable fees or milestone payments in connection
with research and development or collaborative agreements are recognized when
they are earned in accordance with the applicable performance requirements and
contract terms. Revenue from product sales is recognized when all significant
risks of ownership have been transferred, the amount of the selling price is
fixed and determinable, all significant related acts of performance have been
completed, and no other significant uncertainties exist. In most cases, these
criteria are met when the goods are shipped.
(d) DEPRECIATION AND AMORTIZATION. Prior to 1998, depreciation of property,
plant and equipment, with the exception of leasehold improvements and an owned
facility, was provided using an accelerated method over the estimated useful
lives of the assets. For property, plant and equipment purchased after 1997,
depreciation will be provided using the straight-line method over the estimated
useful lives.
(e) NET LOSS PER SHARE. Net loss per share is computed in accordance with
Financial Accounting Standards Board release SFAS No. 128, "Earnings Per Share."
SFAS No. 128 requires dual presentation of basic and diluted earnings per share
on the face of the income statement for all periods presented. Basic earnings
per share excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. SFAS No. 128 was
implemented for the year ended December 31, 1997. Options, warrants, and
convertible securities that were outstanding at the end of all periods presented
were not included in the computation of diluted loss per share as their effect
would have been anti-dilutive. As a result, the basic and diluted loss per share
amounts are identical for all periods presented.
Since the effect of outstanding options, convertible notes, and preferred stock
is antidilutive, they have been excluded from the Company's computation of net
loss per share for both 1998 and 1997. Accordingly, SFAS No. 128 did not have an
impact upon historical net loss per share as reported.
(f) In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company presents its comprehensive income
in the statement of shareholders' equity.
(g) In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
Company is evaluating the impact of SFAS 131, which is required for its year end
1998 reporting.
10
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2. PROPERTY, PLANT AND EQUIPMENT
In March 1998, the Company leased an approximately 75,500 square foot facility
to be used for research, development, general and administrative functions and
for future expansion of the Company's operations. The lease is for an initial
term of ten years, with two five-year renewal options. The initial base annual
rent under the lease is approximately $981,000 with minimum annual escalations.
At the end of the fifth year of the initial term, the Company has the right to
terminate the lease for a specified fee. In addition, the Company has an option
to purchase the facility during specified periods of the lease term. The
landlord has provided the Company a tenant improvement allowance of
approximately $1.4 million, and will provide an additional $1.8 million to the
Company, if needed, under a line of credit to fund improvement costs in excess
of the tenant improvement allowance. Monthly payments under this line of credit
would consist of interest only accruing at the simple annual rate of 12.75%, and
the entire unpaid principal balance would mature in September 2000, unless
extended by the Company up to March 2002. The line of credit also would be
secured by all leasehold improvements and related facility enhancements
purchased with funds provided by the landlord. No funds have been drawn down
under this line of credit.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventory cost include materials, labor, and manufacturing
overhead. Production costs attributable to a product are expensed until
regulatory approval is obtained for such product. Beginning in the third quarter
of 1998, costs to produce Certiva(TM) for sale in the United States were
capitalized. Any production costs incurred in excess of net realizable value are
expensed in the quarter in which they are incurred. Inventories consist of the
following:
September 30, December 31,
1998 1997
------------- ------------
(in thousands)
Raw materials $ 2,497 $ 2,584
Work in process 464 -
Finished goods 159 146
-------- -------
Total $ 3,120 $ 2,730
======== =======
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4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following components:
September 30, December 31,
1998 1997
------------- ------------
(in thousands)
Payroll and fringe benefits $ 2,153 $ 1,488
Accrued interest 2,309 959
Reserve for contract loss 720 720
Accrued taxes 806 642
Accrued costs of clinical trials 329 269
Accrued consulting and professional fees 358 381
Other accrued liabilities 358 605
-------- -------
Total other current liabilities $ 7,033 $ 5,064
======== =======
5. RESTRICTED CASH AND OBLIGATIONS UNDER CAPITAL LEASE
In connection with an operating lease for a 35,000 square foot development and
production facility, the Company entered into an agreement that included the
purchase and lease of equipment and leasehold improvements. As part of the
operating lease, the Company assumed the underlying real estate leases which are
scheduled to expire in February 2001, but may be extended through 2011. Under
the terms of the equipment lease, there are certain financial covenants that
obligate the Company to maintain certain cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated notes), and certain other financial ratios. The equipment lease
agreement permits the Company, at its option, to suspend the application of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company provided certain conditions are satisfied. In April 1998, as
permitted by the equipment lease agreement, the Company voluntarily posted a
letter of credit in the amount of $5.9 million, thereby suspending the
application of all financial covenants. The letter of credit will decrease on a
monthly basis as the payments on the lease obligation are made and is secured by
a restricted cash deposit of an equal amount. The balance of the letter of
credit and the corresponding restricted cash is $5.3 million at September 30,
1998. The letter of credit will expire by its terms on November 1, 2000.
6. STOCK OPTION COMPENSATION
In March 1997, the Company extended the expiration date for an option to
purchase 150,000 shares of common stock at an exercise price of $11.13. The
Company recognized as compensation expense $1.3 million in the quarter ended
March 31, 1997, which was the excess of the fair market value of the Company's
common stock as of the date of the option extension over the exercise price of
$11.13 per share.
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7. RELATED PARTY TRANSACTION
In April 1998, the Company extended a loan to its then president, related to the
exercise of expiring stock options. The loan was comprised of approximately $1.0
million for the exercise of the options and $217,000 for payment of withholding
taxes. The loan was made on a full recourse basis, was for a six month period,
was collateralized by approximately 94,000 shares of common stock of the
Company, which at the time of the loan had a fair market value of 125% of the
principal amount of the loan. The loan accrued interest at a fair market rate.
The loan was repaid in full at maturity during October, 1998, and the collateral
has been released.
8. SUBSEQUENT EVENT
In September 1998, the Company reached an agreement-in-principle to complete a
$25 million financing through the private placement of 4.5% Convertible Secured
Notes ("4.5% Notes"). When issued, the 4.5% Notes are convertible into shares of
the Company's Common Stock at a conversion price of approximately $8.54 per
share. The conversion price was set based on the average closing price of the
Company's Common Stock for the twenty (20) trading days preceding the date of
the announcement of the agreement-in-principle. The measurement period for
determining the conversion price began on August 26, 1998 and terminated on
September 23, 1998. The closing prices of the Company's Common Stock during that
period ranged from a low of $6.875 to a high of $11.25. The 4.5% Notes are to be
secured by certain assets of the Company, will otherwise be subordinated in
right of payment to all existing and future senior indebtedness of the Company,
will not restrict the incurrence of future senior or other indebtedness of the
Company and will be redeemable, in whole or in part, at the option of the
Company on or after one year from the date of issuance at par, plus accrued
interest to the redemption date. Upon a change in control, the Company will be
required to offer to purchase all of the 4.5% Notes then outstanding at a
purchase price equal to 100% of the principal amount thereof, plus interest. The
repurchase price will be payable in cash or, at the option of the Company, in
shares of the Company's Common Stock. The purchasers of the notes will include
the principal shareholders of the Company, BioChem Pharma Inc. ("BioChem") and
Dr. Phillip Frost, which have agreed to purchase up to 36% and 17%,
respectively, of the aggregate principal amount of the 4.5% Notes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
THE FOLLOWING PARAGRAPHS IN THIS FORM 10-Q CONTAIN CERTAIN FORWARD
LOOKING STATEMENTS, WHICH ARE WITHIN THE MEANING OF AND MADE PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THOSE REGARDING
THE PROSPECTS FOR REGULATORY APPROVAL, THE PROSPECTS FOR MARKETING AND
DISTRIBUTION OF VACCINE PRODUCTS, THE PROSPECTS FOR INCREASING PRODUCTION
CAPACITY AND EFFICIENCY, THE PROSPECTS FOR AND FACTORS AFFECTING FUTURE REVENUES
AND PROFITABILITY, LIKELIHOOD OF ADDITIONAL FUNDING UNDER LICENSE, MARKETING,
DISTRIBUTION AND/OR DEVELOPMENT AGREEMENTS OR FROM FURTHER FINANCINGS, CASH
REQUIREMENTS FOR FUTURE OPERATIONS, AND PROJECTED CAPITAL EXPENDITURES. READERS
ARE CAUTIONED THAT FORWARD LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES, AND
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND PROSPECTS, INCLUDING WITHOUT
LIMITATION THOSE DESCRIBED BELOW AS WELL AS THE RISKS ASSOCIATED WITH: OBTAINING
REGULATORY APPROVAL OF PRODUCTS BY REGULATORY AGENCIES INCLUDING THE U.S. FOOD
AND DRUG ADMINISTRATION ("FDA"); THE PRODUCTION OF VACCINES; THE NATURE OF
COMPETITION; NEED FOR EFFECTIVE MARKETING; DEPENDENCE ON SUPPLIERS, INCLUDING
STATENS SERUM INSTITUT ("SSI"); AND UNCERTAINTIES RELATING TO CLINICAL TRIALS,
ALL AS DISCUSSED IN THE COMPANY'S FILINGS WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION ("SEC"), INCLUDING THE 1997 ANNUAL REPORT ON FORM 10-K, TO WHICH THE
READER'S ATTENTION IS DIRECTED.
Background
- ----------
The Company is engaged in the research, development, production, and
sale of vaccines for the prevention of infectious diseases in children and
adults.
In July 1998, the Company received FDA approval to manufacture and
market its DTaP vaccine (Certiva(TM)) in the United States. Under the FDA
approval, Certiva(TM) is indicated for active immunization against diphtheria,
tetanus and pertussis (whooping cough) in infants and children six weeks to
seven years of age. The Company produces the monocomponent acellular pertussis
toxoid and formulates the final product with diphtheria and tetanus toxoids
manufactured and supplied by SSI.
Under a marketing agreement between the Company and Abbott
Laboratories ("Abbott"), Abbott will market Certiva(TM) to private physicians
and managed care markets in the United States for immunization of infants and
children. Abbott began the launch of Certiva(TM) in October 1998. 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 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.
The Company and Abbott are collaborating in the clinical development
of the combination vaccines, and the Company will receive payments upon
14
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achievement of prescribed clinical development milestones. Under the agreement
with Abbott, the Company will receive revenues from Abbott as it purchases
Certiva(TM) and the combination vaccine products for resale to the private
pediatric market in the United States. See "Liquidity and Capital Resources;
Outlook," below.
FDA approval of Certiva(TM) followed regulatory approval in various
European countries of vaccines using the Company's acellular pertussis vaccine.
The Swedish Ministry of Health granted regulatory approval in February 1996 to
market a European formulation of Certiva(TM). This marketing authorization was
the first regulatory approval for any of the Company's products. In addition,
the Danish National Board of Health granted regulatory approval in September
1996 of the DTaP vaccine combined with an enhanced inactivated polio vaccine
("DTaP-IPV") for all primary and booster doses for infants and children in
Denmark. In June 1998, the Company was advised that under the European mutual
recognition procedure, the regulatory authorities in Germany, Austria, Sweden
and Finland agreed to recognize the marketing authorization granted to SSI by
Denmark for the DTaP-IPV vaccine. The mutual recognition procedure now requires
that these regulatory authorities issue national marketing authorizations upon
receipt of certain information, which is presently being prepared for
submission. The Company has appointed Chiron Behring GmbH & Co. ("Chiron") to
market and distribute the DTaP-IPV product in Germany and Austria. SSI holds the
European product registrations and will market and distribute the product in the
Scandinavian, Baltic and other countries comprising its territory ("SSI's
Territory").
Under supply agreements, the Company manufactures the acellular
pertussis component, and SSI manufactures the diphtheria, tetanus and
inactivated polio vaccine ("IPV") components for the DTaP and DTaP-IPV vaccines.
SSI is responsible for the marketing and distribution of the DTaP and DTaP-IPV
products in SSI's Territory. Accordingly, the Company has been selling its
acellular pertussis toxoid to SSI for formulation into DTaP and DTaP-IPV for
sale in its territory.
In 1995, 1996 and 1997, the Company recognized development revenues
pursuant to agreements with Pasteur Merieux Serums et Vaccins, a wholly-owned
subsidiary of Rhone-Poulenc, which operates in North America through its
subsidiary Connaught Laboratories ("Pasteur Merieux-Connaught"), under which the
Company and Pasteur Merieux-Connaught will jointly develop the Company's
meningococcus B vaccine. Additional funding may be provided to the Company by
Pasteur Merieux-Connaught under the terms of the license and clinical
development agreements. See "Liquidity and Capital Resources; 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 ("6.5% Notes"). 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 6.5% Notes are convertible into shares of the
Company's Common Stock, at an initial conversion price of approximately $24.86
per share, are subordinated to present and future senior indebtedness of the
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Company, will not restrict the incurrence of future senior or other indebtedness
by the Company, and 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 6.5% Notes then outstanding at a purchase
price equal to 100% of the principal amount thereof, plus interest. The
repurchase price is payable in cash or, at the option of the Company, in shares
of the Company's Common Stock. In December of 1997, approximately $2.5 million
of the principal amount of the 6.5% Notes were converted into 101,207 shares of
the Company's common stock. As of September 30, 1998, the principal amount of
the outstanding notes was $83.7 million.
In September 1998, the Company reached an agreement-in-principle to
complete a $25 million financing through the private placement of 4.5%
Convertible Secured Notes ("4.5% Notes") with net proceeds estimated at $24.6
million. When issued, the 4.5% Notes are convertible into shares of the
Company's Common Stock at a conversion price of approximately $8.54 per share.
The conversion price was set based on the average closing price of the Company's
Common Stock for the twenty (20) trading days preceding the date of the
announcement of the agreement-in-principle. The measurement period for
determining the conversion price began on August 26, 1998 and terminated on
September 23, 1998. The closing prices of the Company's Common Stock during that
period ranged from a low of $6.875 to a high of $11.25. The 4.5% Notes are to be
secured by certain assets of the Company, will otherwise be subordinated in
right of payment to all existing and future senior indebtedness of the Company,
will not restrict the incurrence of future senior or other indebtedness of the
Company and will be redeemable, in whole or in part, at the option of the
Company on or after one year from the date of issuance at par, plus accrued
interest to the redemption date. Upon a change in control, the Company will be
required to offer to purchase all of the 4.5% Notes then outstanding at a
purchase price equal to 100% of the principal amount thereof, plus interest. The
repurchase price will be payable in cash or, at the option of the Company, in
shares of the Company's Common Stock. The purchasers of the notes will include
the principal shareholders of the Company, BioChem Pharma Inc. ("BioChem") and
Dr. Phillip Frost, which have agreed to purchase up to 36% and 17%,
respectively, of the aggregate principal amount of the Notes. The Company
anticipates that the private placement of the 4.5% Notes will be consummated
during the fourth quarter of 1998. This is a forward looking statement and there
are no assurances that this offering will be completed in a timely manner.
Failure to timely complete the offering would have a material adverse effect on
the Company. See Item 5 -- "Other Information."
In November 1996, the Company acquired a 35,000 square foot
manufacturing facility in Beltsville, Maryland. That acquisition included the
purchase and lease of equipment and leasehold improvements and the assumption of
real estate leases. The total acquisition cost for the equipment and leasehold
improvements was approximately $24.9 million, which included a cash payment of
$17.2 million. The balance of $7.7 million is represented by an equipment lease
obligation accounted for as a capital lease, which expires in 2000. Under the
equipment lease agreement, there are financial covenants that obligate the
Company to maintain certain minimum cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated notes) and certain other financial ratios. The equipment lease
agreement permits the Company, at its option, to suspend the application of
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financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company provided certain conditions are satisfied. In April 1998, as
permitted by the equipment lease agreement, the Company voluntarily posted a
letter of credit in the amount of $5.9 million, thereby suspending the
application of all financial covenants. The letter of credit will decrease on a
monthly basis as the payments on the lease obligation are made and is secured by
a restricted cash deposit of an equal amount. The balance of the letter of
credit and the corresponding restricted cash is $5.3 million at September 30,
1998. The letter of credit will expire by its terms on November 1, 2000. In
addition, the Company has assumed the real estate leases underlying the
facility, which are scheduled to expire in February 2001, but may be extended
through 2011.
The Company had 290 and 261 employees as of September 30, 1998 and
1997, respectively.
Results of Operations
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
In 1998, the Company recognized $501,000 in revenue from product
sales to SSI and $2.6 million under collaborative agreements. Revenue from
collaboration agreements consists of milestone and development funding under the
Company's agreement with Abbott. Revenue in 1997 totaled $7.0 million of which
$6.0 million was from a collaborative agreement with Pasteur Merieux-Connaught.
Production expenses were $5.1 million in 1998 compared to $5.2
million in 1997. The decrease in these expenses in 1998 is primarily
attributable to the capitalization of costs to produce Certiva(TM) inventory for
sale in the United States, and lower depreciation expense related to the use of
an accelerated depreciation method in prior years. These decreases were offset
by higher labor expenses, attributable primarily to an increase in the number of
employees and to payments made under a licensing agreement. Costs attributable
to Certiva(TM) production were expensed until regulatory approval was obtained
in the third quarter of 1998.
Research and development expenses were $4.7 million in 1998 compared
to $4.9 million in 1997. The decrease is attributable primarily to lower
depreciation expense related to the use of an accelerated depreciation method in
prior years. This decrease was offset in part by higher building costs
associated with the new 75,500 square foot leased facility and to increased
expenses for patent filings. See "Liquidity and Capital Resources; Outlook,"
below.
General and administrative expenses were $2.4 million in 1998
compared to $3.3 million in 1997. The decrease is primarily due to a non-
recurring royalty payment made in 1997.
Interest and dividend income decreased to $276,000 in 1998 from
$739,000 in 1997. This reduction is due to a decrease in the average cash
balance.
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Interest expense decreased to $1.6 million in 1998 from $1.7 million
in 1997. The decrease is due to principal payments made on the equipment lease,
as well as to the conversion of $2.5 million principal amount of convertible
notes into common stock of the Company in December 1997.
The factors cited above resulted in a net loss of $10.5 million or
$0.32 per share in 1998 as compared to a net loss of $7.4 million or $0.23 per
share in 1997. The weighted-average number of common shares outstanding was 32.2
million for 1998 compared to 31.6 million for 1997. The increase in the number
of weighted-average shares outstanding for 1998 as compared to 1997 is
attributable primarily to the exercise of stock options and the conversion of
$2.5 million principal amount of convertible notes into 101,207 shares of common
stock in December 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
In 1998, the Company recognized $845,000 in revenue from product
sales to SSI and $4.3 million under collaborative agreements. Revenue from
collaboration agreements consists primarily of milestone payments and
development funding under the Company's agreement with Abbott and to a lesser
extent milestone payments under a supply and distribution agreement with Chiron.
Revenue in 1997 consisted of $1.4 million from product sales to SSI and $7.7
million of revenue from collaborative agreements of which $6.0 million was from
an agreement with Pasteur Merieux-Connaught.
Production expenses were $14.3 million in 1998 compared to $13.9
million in 1997. The increase in these expenses in 1998 is primarily
attributable to an increase in the number of production and service-related
employees as the Company prepared for regulatory approval of Certiva(TM). The
increase was offset in part by lower depreciation expense related to the use of
an accelerated depreciation method in prior years and to the capitalization of
Certiva(TM) inventory for sale in the United States following FDA approval.
Costs attributable to Certiva(TM) production were expensed until regulatory
approval was obtained.
Research and development expenses were $13.3 million in 1998 compared
to $14.5 million in 1997. The decrease is attributable primarily to lower
depreciation expense related to the use of an accelerated depreciation method in
prior years, reduced expenses for clinical trials, and reimbursements for
expenses under a collaborative agreement. These decreases were offset in part by
higher labor expenses as a result of an increase in the number of employees and
higher building costs.
General and administrative expenses were $7.2 million in 1998 as
compared to $8.9 million in 1997. The decrease is primarily due to the
recognition of a non-cash compensation expense of approximately $1.3 million and
a non-recurring royalty payment both incurred in 1997, offset in part by higher
labor expenses as a result of an increase in the number of employees.
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Interest and dividend income decreased to $1.2 million in 1998 from
$2.5 million in 1997. This reduction is due primarily to a decrease in the
average cash balance.
Interest expense decreased to $4.8 million in 1998 from $5.1 million
in 1997. The decrease is due to principal payments made on the equipment lease,
as well as to the conversion of $2.5 million principal amount of convertible
notes into common stock of the Company in December 1997.
The factors cited above resulted in a net loss of $33.2 million or
$1.03 per share in 1998 as compared to a net loss of $30.8 million or $0.97 per
share in 1997. Without the effect of the $1.3 million non-cash compensation
expense, the loss in 1997 would have been $29.4 million or $.93 per share. The
weighted-average number of common shares outstanding was 32.1 million for 1998
compared to 31.6 million for 1997. The increase in the number of
weighted-average shares outstanding for 1998 as compared to 1997 is attributable
primarily to the exercise of stock options and the conversion of $2.5 million
principal amount of convertible notes into 101,207 shares of common stock in
December 1997.
Liquidity and Capital Resources; Outlook
- ----------------------------------------
The Company recognized a net loss of $10.5 million in the third
quarter of 1998 as compared to a net loss of $11.0 in the second quarter. The
Company's cash requirement for operations was $9.7 million in the third quarter
of 1998 as compared to $11.8 million in the second quarter of 1998. The
Company's cash requirement for operations is the net cash used in operating
activities for the period being reported less amounts received under license,
marketing, distribution and/or development agreements and further adjusted by
the timing of proceeds from the sale of an investment in an affiliate.
The decrease in cash requirements from the second quarter is
attributable primarily to a semi-annual interest payment of $2.7 million on the
6.5% Notes made in May 1998. At September 30, 1998, the Company had cash and
cash equivalents of approximately $14.7 million, of which $5.3 million is
pledged as collateral under the letter of credit agreement described above, and
investment securities in an affiliate with a market value of $1.1 million. The
investment consisted of 125,000 shares of IVAX Corporation ("IVAX") common
stock. The fair market value of such stock as of November 4, 1998 was
approximately $1.2 million. This investment is volatile and therefore subject to
significant fluctuations in value.
The Company expects to incur a net loss of between $11 and $12
million in the fourth quarter of 1998 and that cash requirements for operations
in that period are projected to be between approximately $11.5 and $12.5
million. The quarterly operating results and the cash requirements for
operations projected for the fourth quarter are not expected to be materially
different from those incurred in prior periods and will likely be primarily
attributable to production costs for Certiva(TM); production costs for the
Company's acellular pertussis vaccine for sale in Europe; production of
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investigational combination vaccines and conjugate vaccines for clinical
investigations; costs incurred in preparing for and conducting clinical trials;
and the semi-annual interest payment of $2.7 million on the 6.5% Notes paid on
November 1, 1998. Costs incurred to produce Certiva(TM) for sale in the United
States were expensed as incurred prior to FDA approval. Initial sales of
Certiva(TM) made during the fourth quarter and into 1999 are expected to be made
from existing inventory produced prior to regulatory approval. Accordingly,
until such inventory is sold, the cost of goods to be reported by the Company
will be lower than in subsequent periods. Beginning in the third quarter,
production expenses for Certiva(TM) are capitalized in accordance with generally
accepted accounting principles and recognized as expense when product is sold.
Any production costs incurred in excess of net realizable value will be expensed
in the quarter in which they are incurred. This paragraph contains forward
looking statements and the factors which affect the actual cash required for
operations will include: the production levels of vaccine product for commercial
sale and clinical investigations; marketing costs associated with the launch of
Certiva(TM) in the United States; timing of regulatory authorization to commence
clinical investigations; timing for the commencement of planned clinical trials;
and the level of expenditures for the Company's ongoing research and development
program.
The Company anticipates that it will incur quarterly net operating
losses in 1999 based upon several factors. As described above, Abbott will
market Certiva(TM) to private physicians and managed care markets in the United
States for immunization of infants and children and the Company will market the
product to government purchasers, including state governments and the CDC.
Certiva(TM) has been launched by Abbott during the fourth quarter of 1998 and
the Company initially anticipates limited revenues as the product is first
introduced to U.S. pediatricians and other vaccine purchasers. This is a forward
looking statement and the factors that affect the success of the commercial
launch of Certiva(TM) include, among other things, the ability of Abbott and the
Company's internal marketing organization to effectively position Certiva(TM)
against competitive products and the Company's ability to manufacture and
deliver products in accordance with customer orders. In this regard, the
Company's manufacturing facility has limited production capacity based on the
present size, configuration, equipment, processes and methods utilized to
produce Certiva(TM). During the first three quarters of 1999, the Company
expects that costs to produce Certiva(TM) and its acellular pertussis toxoid
will exceed their respective net selling prices. The Company believes that unit
production costs will be reduced significantly in late 1999, as the Company
substantially increases production capacity and output from its existing
facility. The Company has completed engineering designs, and is preparing to
begin modifying its existing facilities and operations in a manner intended to
enhance production capabilities and significantly expand production capacity and
efficiency. These enhancements are presently scheduled to be completed in the
latter half of 1999. Following completion of these enhancements, the Company
believes it will produce Certiva(TM) in quantities sufficient to generate a
gross margin based on current known pricing arrangements. The foregoing are
forward looking statements and the factors affecting the ability of the Company
to timely and efficiently expand its production capacity include, among others,
the adequacy of engineering designs, the availability of needed equipment, the
manufacturing experience with these enhancements, the timeliness of regulatory
review of modifications, and the acceptability of such modifications to the
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applicable regulatory authorities. There can be no assurances that the Company's
plans to increase production capacity and output will be effective or result in
anticipated production efficiencies. Finally, the Company is continuing its
development efforts for several products, including those covered by existing
marketing, license and research agreements. Although the Company is entitled,
under those agreements, to milestone payments upon achievement of prescribed
events, there are no assurances that such milestone events will occur during
1999, or at all, or that any such payments will contribute materially to
quarterly net operating results.
Total capital expenditures for the first nine months of 1998 were
$1.3 million. In March 1998, the Company leased an approximately 75,500 square
foot facility to be used for research, development, general and administrative
functions and for future expansion of the Company's operations. The Company
received from the landlord a tenant improvement allowance of $1.4 million. In
addition, the landlord committed an additional $1.8 million, if needed, under a
line of credit to fund excess improvement costs. The Company has not drawn down
under the line of credit and has not advised the landlord of any intention to do
so. The Company currently anticipates that total capital expenditures to modify
the facility would not exceed the $1.4 million tenant improvement allowance
described above. In addition, as noted above, the Company has completed designs
to expand manufacturing capacity and efficiency for its acellular pertussis
toxoid and Certiva(TM). Total projected capital expenditures for 1998 for
facilities' modifications, equipment, systems and other capital additions could
range between $2 million to $4 million. The foregoing include forward looking
statements. The amount of and timing for capital expenditures could fluctuate
based upon a number of factors including, without limitation: the ultimate
configuration of the proposed facility modifications and leasehold improvements,
the equipment purchases required in order to expand the Company's production
capacity, and the amount and timing of unanticipated costs to replace or repair
existing equipment and systems in order to keep facilities operational and in
compliance with regulatory requirements.
Cash requirements for operations and capital expenditures for the
remainder of 1998 and into 1999 are expected to be financed through a
combination of: cash and cash equivalents (including the proceeds to be received
by the Company upon completion of the sale of the 4.5% Notes); product sales;
fees and payments from existing and/or new license, marketing, distribution
and/or development agreements; the exercise of stock options; mortgage
financing; lines of credit; and equipment leases. In order to maintain the
Company's production, research, development and growth at present or increased
levels, the Company anticipates that it will secure additional financing through
the sale of debt and/or equity securities during the latter half of 1999. If
such financing is not available to the Company, then the Company would reduce
its cash requirements through significant reductions in operating levels. This
paragraph contains forward looking statements, and there can be no assurances
that the Company will be able to place debt or equity securities on favorable
terms or in an amount required to meet its future cash requirements, or that the
Company would be successful in reducing operating levels, or if operating levels
are reduced, it would be able to maintain operations for any extended period of
time.
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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.
The foregoing paragraphs contain only a partial description of the
factors affecting the Company's business prospects and risk factors affecting
future operations. Reference is made to the risk factors and other information
contained in this report, as well as the Company's other filings with the SEC,
for a more complete description of the risks and uncertainties affecting the
Company and its business.
Tax and Other Matters
- ---------------------
ACCOUNTING AND TAX IMPACT OF CONSUMMATION OF SALE OF 4.5% NOTE
("OFFERING"). Under generally accepted accounting principles if the fair market
value of the Company's Common Stock is greater than the conversion price of the
4.5% Notes on the date of issue, then the Company must recognize for accounting
purposes a beneficial conversion feature by allocating a portion of the
Offering's proceeds to paid-in capital. The discount represented by an
allocation to paid-in capital would be calculated as the difference between the
fair market value per share of the Common Shares on the date the 4.5% Notes are
issued and the conversion price for the 4.5% Notes, multiplied by the aggregate
number of shares into which the 4.5% Notes would then be convertible. The
discount also would be deemed an increase in the effective interest rate of the
4.5% Notes and would be reflected as a charge to interest expense. The discount
would be amortized as interest expense over the period from the date of issuance
of the 4.5% Notes to the date the 4.5% Notes first become convertible. Because
the 4.5% Notes are immediately convertible, this would result in a one-time
interest charge in the quarter in which the Offering closes.
In addition, with recent amendments to the U.S. tax laws, the 4.5%
Notes may be deemed to be disqualified debt instruments, such that the Company
would not be permitted to deduct the annual $1.1 million interest payments for
U.S. federal tax purposes. Under the new law, if there is a substantial
certainty that the 4.5% Notes would be converted as of the date of issuance,
they would be disqualified for deductibility purposes. In the near term, this
would reduce the Company's net operating losses to be used to offset any future
operating profits, and if the Company earns any operating profits while the 4.5%
Notes are outstanding, the non-deductibility of the interest payments would
effectively increase the Company's U.S. federal tax liability.
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OTHER TAX ISSUES. 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 Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997. The Company has implemented SFAS No. 128
for 1997 and 1998. SFAS No. 128 requires dual presentation of basic and diluted
earnings per share. Basic loss per share includes no dilution and is computed by
dividing net loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted loss per share
includes the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Options, warrants and convertible securities that were outstanding at September
30, 1997 and 1998, were not included in the computation of diluted loss per
share as their effect would be anti-dilutive. As a result, the basic and diluted
loss per share amounts are identical.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company has implemented SFAS 130 beginning with the first
quarter 1998 financial statements. The implementation of this standard did not
result in a material impact to the Company's financial statements. The Company
is currently evaluating the impact of SFAS 131, which is required to be
implemented in the Company's year end 1998 financial statements.
Impact of the Year 2000 Issue On the Company
- --------------------------------------------
The Year 2000 issue is the result of some computers, software and
other equipment, including computer code, in which calendar year data is
abbreviated to only two digits. Management has initiated a company-wide program
to prepare the Company's information systems for the year 2000. Based on a
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recent internal interim assessment, the Company believes that the principal
management information system software that was recently purchased and is
currently being implemented is designed to be Year 2000 compliant. However,
there can be no assurances in this regard. The Company intends to test the
system for Year 2000 compliance. The Company also uses various "off the shelf"
software applications for the storage and analysis of various types of data and
systems. Management is dependent on this software for day-to-day operations. The
Company is currently in the inventory and assessment phases in which it is
evaluating all such applications and systems, as well as embedded systems, in
order to determine whether or not modifications or replacement will be necessary
to achieve Year 2000 qualification. This is an ongoing process and the Company
is unable at this time to assess the impact, if any, this assessment might
ultimately have on the Company's systems and operations or its future financial
position or results of operations. Upon completion of its assessment, the
Company will commence any required remediation, beginning with its mission
critical systems.
The Company has not communicated with all of its significant
suppliers to determine the extent to which the Company is vulnerable to failures
by such third parties to remediate their own Year 2000 issues. The Company has
not been advised by its suppliers that costs to obtain Year 2000 compliance will
be passed on to the Company; however, there can be no assurances that such costs
will not be passed through to the Company either directly or indirectly or, if
passed through to the Company, the magnitude of such charges. The systems of
other companies on which the Company's systems rely may not be timely converted.
Accordingly, there are no assurances that the failure by such other companies'
systems to achieve Year 2000 qualification, or qualify in a manner that is
compatible to Company systems, would not have a material adverse effect on the
Company. Upon completion of the assessment phase, the Company intends to develop
contingency plans for various possible scenarios.
The Company has determined that it has no exposure to contingencies
related to the Year 2000 Issue for product it has sold. Based on the preliminary
internal assessment, the Company has not identified any material costs or
expenditures specifically related to modifications of information systems for
Year 2000 compatibility. This internal assessment is a continuing process,
consequently there can be no assurances that the Company will not be required to
expend significant amounts on achieving Year 2000 qualification or that such
expenditures will not have a material adverse affect on future results from
operations or financial condition.
The foregoing paragraphs contain forward looking statements and the
factors affecting the impact of Year 2000 on the Company include, among others,
the availability and cost of programming and testing resources, vendors' ability
to modify proprietary software, unanticipated problems identified in the ongoing
compliance assessment, and compliance of material third party suppliers and
vendors.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION
-----------------
In September 1998, the Company reached an agreement-in-principle to
complete a $25 million financing through the private placement of the 4.5%
Notes, with net proceeds estimated at $24.6 million. When issued, the 4.5% Notes
are convertible into shares of the Company's Common Stock at a conversion price
of approximately $8.54 per share. The conversion price was set based on the
average closing price of the Company's Common Shares for the twenty (20) day
period preceding the date of the announcement of the agreement-in-principle. The
measurement period for determining the conversion price began on August 26, 1998
and terminated on September 23, 1998. The closing prices of the Company's Common
Stock during that period ranged from a low of $6.875 to a high of $11.25. The
4.5% Notes are to be secured by certain assets of the Company, will otherwise be
subordinated in right of payment to all existing and future senior indebtedness
of the Company, will not restrict the incurrence of future senior or other
indebtedness of the Company and will be redeemable, in whole or in part, at the
option of the Company on or after one year from the date of issuance at par,
plus accrued interest to the redemption date. Upon a change in control, the
Company will be required to offer to purchase all of the 4.5% Notes then
outstanding at a purchase price equal to 100% of the principal amount thereof,
plus interest. The repurchase price will be payable in cash or, at the option of
the Company, in shares of the Company's Common Stock. The purchasers of the
notes will include the principal shareholders of the Company, BioChem and Dr.
Phillip Frost, which have agreed to purchase up to 36% and 17%, respectively, of
the aggregate principal amount of the 4.5% Notes. The Company anticipates that
the private placement of the 4.5% Notes will be consummated during the fourth
quarter of 1998. This is a forward looking statement and the factors that affect
the timely completion of the offering relate to the investors' receipt and
acceptance of the definitive documents relating to the offering, and the outcome
of the litigation described below. Any failure or delay in consummating the
offering as a result of the litigation or otherwise would have a material
adverse effect on the Company given the Company's present cash resources and
anticipated cash requirements for operations.
On October 21, 1998, the Company announced the appointment of Randal
D. Chase, Ph.D. as the Company's President and Chief Executive Officer.
Previously, Dr. Chase was the President and Chief Executive Officer of Pasteur
Merieux-Connaught (Canada) from January 1996. He also served as a member of the
Executive Committee for Pasteur Merieux-Connaught (Worldwide), as Chairman of
Pasteur Merieux-Connaught (Mexico) and as a member of the Board of Directors of
Rhone-Poulenc Canada. Prior to joining Pasteur Merieux-Connaught, Dr. Chase
served as the President and Chief Executive Officer of Quadra Logic
Technologies. Dr. Chase also serves on several outside boards, including the
Board of New York General Hospital, BIOtech Canada and Innovations Foundations
at the University of Toronto.
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On November 3, 1998, the Company was advised that Sharon Mates,
Ph.D., a director of the Company and the Company's former president, initiated
litigation in United States District Court, District of Maryland (Civil Action
No. AW 98-3678) (the "Complaint") against the Company, two of its directors and
BioChem. The claims against the Company seek principally the following:
declaratory relief against the Company regarding the approval and consummation
of the private placement of the 4.5% Notes; injunctive relief seeking to prevent
the Company from consummating the private placement of the 4.5% Notes;
injunctive relief against the Company relating to Dr. Mates' access to Company
books and record and to her continued service as a director; declaratory relief
regarding the termination of employment and removal as president of the Company;
and claims against the Company alleging abusive discharge and defamation. The
Complaint also seeks actual and punitive damages against the Company in an
unspecified amount. The Company intends to vigorously contest and defend against
these claims in this litigation. The Company believes that the claims against it
are without merit and that the Company has meritorious defenses available to it.
Accordingly, in the opinion of management, this lawsuit will not have an adverse
effect on the Company. The foregoing are forward looking statements, and there
can be no assurances that the Company will prevail in this litigation.
In addition, the Complaint seeks declaratory and injunctive relief
against Dr. Frost and BioChem arising out of alleged violations of the reporting
requirements of Sections 13(d) and Rule 13d-1(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and unspecified damages from Drs.
Frost and Bellini and BioChem for tortious interference with Dr.
Mates' business relations with the Company.
26
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
27
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH AMERICAN VACCINE, INC.
(Registrant)
By: /s/ Randal D. Chase
-------------------------------------
Randal D. Chase, Ph.D.
President and Chief Executive Officer
By: /s/ Lawrence J. Hineline
------------------------
Lawrence J. Hineline
Vice President - Finance
Date: November 6, 1998
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,410
<SECURITIES> 1,093
<RECEIVABLES> 2,505
<ALLOWANCES> 0
<INVENTORY> 3,120
<CURRENT-ASSETS> 15,957
<PP&E> 59,604
<DEPRECIATION> 32,973
<TOTAL-ASSETS> 51,835
<CURRENT-LIABILITIES> 14,506
<BONDS> 83,734
0
6,538
<COMMON> 80,742
<OTHER-SE> (136,542)
<TOTAL-LIABILITY-AND-EQUITY> 51,835
<SALES> 845
<TOTAL-REVENUES> 5,127
<CGS> 0
<TOTAL-COSTS> 34,736
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,793
<INCOME-PRETAX> (33,170)
<INCOME-TAX> 0
<INCOME-CONTINUING> (33,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,170)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
